UNITED STATES OF AMERICA
In the Matter of
FIFTH THIRD SECURITIES, INC.,
|ORDER INSTITUTING PUBLIC ADMINISTRATIVE PROCEEDINGS, MAKING FINDINGS, ORDERING RESPONDENT TO CEASE AND DESIST, AND IMPOSING REMEDIAL SANCTIONS|
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Fifth Third Securities, Inc. ("Fifth Third Securities" or "Respondent") pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78o(b) and 78u-3].
In anticipation of the institution of these administrative proceedings, Respondent has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings, and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and prior to a hearing and without admitting or denying the Commission's findings contained herein, except that Respondent admits the jurisdiction of the Commission over it and over the subject matter of these proceedings, and admits the findings in paragraph III.B., Respondent consents to the entry of this Order Instituting Public Administrative Proceedings, Making Findings, Ordering Respondent to Cease and Desist, and Imposing Remedial Sanctions ("Order").
On the basis of this Order and the Offer submitted by Fifth Third Securities, the Commission finds:
This action involves violations of the law concerning political contributions and municipal securities business. Fifth Third Securities is a broker-dealer and municipal securities dealer affiliated with Fifth Third Bank. Between 1998 and 2000, officers of two affiliate banks of Fifth Third Bank engaged in solicitation activities that made the officers "municipal finance professionals" under Municipal Securities Rulemaking Board ("MSRB") Rule G-37.1 The solicitation activities of the two Fifth Third Bank officers made them municipal finance professionals not just as to the issuers from which they solicited municipal securities business, but made them municipal finance professionals with respect to all issuers. Those officers also directed certain political contributions from Fifth Third Bank's political action committee and made direct political contributions to candidates for offices with influence over the awarding of municipal securities business by certain issuers. The issuers to whose officials the political contributions were made were different from the issuers from which the bank officers solicited municipal securities business. Within two years of these political contributions, Fifth Third Securities engaged in municipal securities business with the issuers associated with the candidates who received the political contributions. Fifth Third Securities' engagement in municipal securities business with these issuers violated Section 15B(c)(1) of the Exchange Act and MSRB Rule G-37.
Fifth Third Securities is an Ohio corporation with its principal place of business in Cincinnati, Ohio. At all times relevant to these proceedings, Fifth Third Securities was a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act and with the MSRB as a municipal securities dealer as defined in Sections 3(a)(30) and 3(a)(31) of the Exchange Act. At all times relevant to these proceedings, Fifth Third Securities was a wholly-owned subsidiary of Fifth Third Bancorp and an affiliate of Fifth Third Bank, which is composed of affiliate banks located in Ohio, Kentucky, Indiana, Florida, Arizona, Michigan and Illinois.
Between 1998 and 2000, two senior Fifth Third Bank executives engaged in activities that constituted solicitation of municipal securities business from certain issuers on behalf of Fifth Third Securities. As a result, these two individuals (hereinafter "the two Fifth Third Bank executives") became municipal finance professionals associated with Fifth Third Securities under MSRB Rule G-37. In addition, the two Fifth Third Bank executives controlled Fifth Third Bank's political action committee (PAC) under certain circumstances. Specifically, between 1997 and 2000, the two Fifth Third Bank executives controlled certain political contributions made by the PAC using money contributed by employees of the two Fifth Third Bank executives' respective affiliate banks.
Between 1997 and 2001, the two Fifth Third Bank executives directed one contribution totaling $1,000 from the PAC and made thirteen direct contributions totaling $15,750 to candidates or incumbents for elective offices responsible for, or having the authority to appoint persons who were responsible for, the hiring of brokers, dealers, or municipal securities dealers for municipal securities business by certain units of state and local government in the State of Ohio (hereinafter "the Issuers"). Under Rule G-37, each of these contributions triggered a two-year ban on municipal securities business with the Issuers, starting with the dates of the contributions.2
2. Violative Conduct
Within two years of the above-mentioned political contributions, Fifth Third Securities sought, and was selected to participate in, twenty-four municipal securities transactions, which included negotiated underwritings of municipal securities offered by the Issuers. Fifth Third Securities engaged in these transactions despite the bans flowing from the above-mentioned political contributions.
In total, the twenty-four transactions represented sales to the public of approximately $2.3 billion. For its roles in the twenty-four transactions, Fifth Third Securities earned approximately $1 million in underwriting fees.
D. LEGAL ANALYSIS
1. MSRB Rule G-37
Rule G-37 was enacted for several reasons, among them to ensure that the high standards and integrity of the municipal securities industry are maintained and to remove any appearance that decisions by municipalities in awarding negotiated underwriting business might have been influenced by political contributions. Adherence to Rule G-37 ensures that all firms will compete, and be perceived as competing, for municipal finance business on the basis of merit rather than their association with campaign contributions.
Subsection (b) of Rule G-37 provides that no broker, dealer or municipal securities dealer shall engage in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by (i) the broker, dealer or municipal securities dealer; (ii) any municipal finance professional associated with such broker, dealer or municipal securities dealer; or (iii) any PAC controlled by the broker, dealer or municipal securities dealer or by any municipal finance professional, unless the contribution is exempt.3
"Municipal finance professional" is defined in the Rule to include "any associated person who solicits municipal securities business." The two Fifth Third Bank executives were associated persons of Fifth Third Securities as defined in Exchange Act Section 3(a)(18) because the two executives were under common control with Fifth Third Securities, and they solicited municipal securities business on behalf of Fifth Third Securities. The solicitation activities of the two Fifth Third Bank executives made them municipal finance professionals not just as to the issuers from which they solicited municipal securities business, but made them municipal finance professionals with respect to all issuers.
Therefore, the political contributions to officials of the Issuers by the two Fifth Third Bank executives and by the PAC, in an instance when one of the two Fifth Third Bank executives controlled the PAC's contributions, triggered two-year prohibitions on Fifth Third Securities' engaging in municipal securities business with the Issuers, even though the solicitation activity of the two Fifth Third Bank executives did not involve the Issuers. Nevertheless, Fifth Third Securities engaged in municipal securities business with the Issuers during the two-year prohibitions, and therefore willfully violated MSRB Rule G-37(b).4
2. Exchange Act Section 15B(c)(1)
Fifth Third Securities willfully violated Section 15B(c)(1) of the Exchange Act in that, in contravention of MSRB Rule G-37, it made use of the mails or other means or instrumentalities of interstate commerce to effect transactions in, or to induce or attempt to induce the purchase or sale of, municipal securities.
Based on the foregoing, the Commission deems it appropriate and in the public interest to accept the Offer of Settlement and accordingly, pursuant to Sections 21B and 21C of the Exchange Act,
IT IS HEREBY ORDERED, effective immediately, that:
Fifth Third Securities undertakes:
To retain, within twenty days of the date of this Order, at Fifth Third Securities' expense, an Independent Consultant acceptable to the Commission's staff, to conduct a review of, and to report and make recommendations as to, Fifth Third Securities' supervisory and compliance policies and procedures related to the types of conduct which gave rise to these proceedings and which are described in this Order.
Fifth Third Securities shall cooperate fully with the Independent Consultant in this review, including making available such non-privileged information and documents as the Independent Consultant may reasonably request, and by permitting and requiring Fifth Third Securities' employees and agents to supply such non-privileged information and documents as the Independent Consultant may reasonably request. The Independent Consultant shall maintain the confidentiality of all materials provided by Fifth Third Securities and shall not provide the materials to any person, provided, however, that such materials may be provided to the Commission or its staff.
The Independent Consultant shall provide a written report to Fifth Third Securities and the staff of the Commission within three months of the date of this Order setting forth the Independent Consultant's recommendations. The Independent Consultant shall have the option to seek an extension of time by making a written request to the Commission staff.
Fifth Third Securities shall adopt all recommendations contained in the written report of the Independent Consultant; provided, however, that as to any recommendation that Fifth Third Securities believes is unduly burdensome or impractical, Fifth Third Securities may suggest an alternative policy or procedure designed to achieve the same objective, submitted in writing to the Independent Consultant and the Commission staff. Fifth Third Securities and the Independent Consultant shall then attempt in good faith to reach agreement as to any policy or procedure as to which there is any dispute, and the Independent Consultant shall reasonably evaluate any alternative policy or procedure proposed by Fifth Third Securities. Fifth Third Securities will abide by the Independent Consultant's determinations with regard thereto and adopt those recommendations deemed appropriate by the Independent Consultant.
Within thirty days of the receipt of the Independent Consultant's written report, Fifth Third Securities shall implement the recommendations of the Independent Consultant and shall submit an affidavit to the Commission staff stating that it has done so. Fifth Third Securities shall have the option to seek an extension of time by making a written request to the Commission staff.
To ensure the independence of the Independent Consultant, Fifth Third Securities (i) shall not have the authority to terminate the Independent Consultant without the prior written approval of the Commission staff; and (ii) shall compensate the Independent Consultant, and persons engaged to assist the Independent Consultant, for services rendered pursuant to this Order at their reasonable and customary rates.
For the period of the engagement and for a period of two years from the completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Fifth Third Securities, directly or indirectly. Any firm with which the Independent Consultant is affiliated or of which he/she is a member, and any person engaged to assist the Independent Consultant in performance of his/her duties under this Order, shall not, without prior written consent of the Commission staff, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Fifth Third Securities, directly or indirectly, for the period of the engagement and for a period of two years after the engagement.
By the Commission.
Jonathan G. Katz
|1||Rule G-37(g)(iv)(B) provides that "the term `municipal finance professional' [includes] . . . any associated person [of a broker, dealer or municipal securities dealer] who solicits municipal securities business."|
|2||The two Fifth Third Bank executives did not solicit the Issuers for municipal securities business.|
|3||Rule G-37(b) exempts contributions by a municipal finance professional of up to $250 per candidate per election if the municipal finance professional is entitled to vote for that candidate.|
|4||Rule G-37 is a broad prophylactic measure. Finding a violation of Rule G-37(b) does not require a showing of scienter or a quid pro quo. "Willfully" as used in this Order means intentionally committing the act which constitutes the violation. See Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000); Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). There is no requirement that the acting entity also be aware that it is violating any rule or statute.|
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