[Federal Register Volume 62, Number 218 (Wednesday, November 12, 1997)]
[Notices]
[Pages 60741-60743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29748]
[[Page 60741]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39303; File No. SR-PCX-97-36]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendment
Nos. 1 and 2 Thereto by the Pacific Exchange, Inc., Relating to
Codifying Certain Requirements of the Telemarketing and Consumer Fraud
and Abuse Prevention Act
November 5, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 9, 1997, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the self-
regulatory organization. The PCX filed Amendment No. 1 to its proposed
rule change on October 14, 1997,\3\ and Amendment No. 2 on October 23,
1997.\4\ The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons and to grant
accelerated approval of the proposed rule change, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the PCX requested accelerated approval
of its filing on the ground that the Commission has already approved
similar filings of other Self-Regulatory Organizations. See Letter
from Michael Pierson, Senior Attorney, Regulatory Policy, PCX, to
Jerome Roche, Law Clerk, Division of Market Regulation, SEC, dated
October 9, 1997.
\4\ In Amendment No. 2, the PCX narrowed the scope and
applicability of PCX Rule 9.20(b). Additionally, the PCX amended
Rule 9.23 to include ``telemarketing scripts'' within the definition
of ``sales literature.'' See Letter from Michael Pierson, Senior
Attorney, Regulatory Policy, PCX, to Jerome Roche, Law Clerk,
Division of Market Regulation, SEC, dated October 22, 1997.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange is proposing to amend its Rules in order to codify
certain requirements of the Telemarketing and Consumer Fraud and Abuse
Prevention Act (``Telemarketing Act''), which became law in August
1994.\5\ The text of the proposed rule change and Amendment Nos. 1 and
2 is available at the Office of the Secretary, PCX, and at the
Commission.
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\5\ 15 U.S.C. 6101-08.
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item III below. The self-regulatory
organization has prepared summaries, set forth in sections A, B, and C
below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Pursuant to the Telephone Consumer Protection Act (``TCPA''),\6\
the Exchange adopted in October 1996 a ``cold call'' rule to implement
certain rules of the Federal Communications Commission (``FCC Rule'')
\7\ that require persons who engage in telephone solicitations to sell
products and services (``telemarketers'') to establish and maintain a
list of persons who have requested that they not be contacted by the
caller (a ``do-not-call'' list).\8\ Under the Telemarketing Act, the
Federal Trade Commission adopted detailed regulations (``FTC Rules'')
\9\ to prohibit deceptive and abusive telemarketing acts and practices;
the regulations became effective on December 31, 1995.\10\ The FTC
Rules, among other things, (i) require the maintenance of ``do-not-
call'' lists and procedures, (ii) prohibit abusive, annoying, or
harassing telemarketing calls, (iii) prohibit telemarketing calls
before 8 a.m. or after 9 p.m., (iv) require a telemarketer to identify
himself, the company he works for, and the purpose of the call, and (v)
require express written authorization or other verifiable authorization
from the customer before use of negotiable instruments called ``demand
drafts.'' \11\
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\6\ 47 U.S.C. 227.
\7\ Pursuant to the TCPA, the FCC adopted rules in December 1992
that, among other things, (1) prohibit cold-calls to residential
telephone customers before 8 a.m. or after 9 p.m. (location time at
the called party's location) and (2) require persons or entities
engaging in cold-calling to institute procedures for maintaining a
``do-not-call'' list that includes, at a minimum, (a) a written
policy for maintaining the do-not-call list, (b) training personnel
in the existence and use thereof, (c) recording a consumer's name
and telephone number on the do-not-call list at the time the request
not to receive calls is made, and retaining such information on the
do-not call list for a period of at least ten years, and (d)
requiring telephone solicitors to provide the called party with the
name of the individual caller, the name of the person or entity on
whose behalf the call is being made and a telephone number or
address at which such person or entity may be contacted. 57 FR 48333
(codified at 47 CFR 64.1200). With certain limited exceptions, the
FCC Rule applies to all residential telephone solicitations,
including those relating to securities transactions. Id. The term
``telephone solicitation'' refers to the initiation of a telephone
call or message for the purpose of encouraging the purchase or
rental of, or investment in, property, goods, or services, which is
transmitted to any person, other than with the called person's
express invitation or permission, or to a person with whom the
caller has an established business relationship, or by tax-exempt
non-profit organization. Id.
\8\ Securities Exchange Act Release No. 37897 (October 30, 1996)
61 FR 57937 (November 8, 1996) (order approving File No. SR-PSE-96-
32).
\9\ 16 CFR 310.
\10\ Secs. 310.3-4 of FTC Rules.
\11\ Id. Pursuant to the Telemarketing Act, the FTC Rules do not
apply to brokers, dealers, and other securities industry
professionals. Section 3(d)(2)(A) of the Telemarketing Act.
A ``demand draft'' is used to obtain funds from a customer's
bank account without that person's signature on a negotiable
instrument. The customer provides a potential payee with bank
account information that permits the payee to create a piece of
paper that will be processed like a check, including the words
``signature on file'' or ``signature preapproved'' in the location
where the customer's signature normally appears.
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Under the Telemarketing Act, the SEC is required either to
promulgate or to require the self-regulatory organizations (``SROs'')
to promulgate rules substantially similar to the FTC Rules, unless the
SEC determines either that the rules are not necessary or appropriate
for the protection of investors or the maintenance of orderly markets,
or that existing federal securities laws or SEC rules already provide
for such protection.\12\ The
[[Page 60742]]
purpose of the proposed rule change is to amend PCX Rule 9.20 in
response to the Commission's request that SROs promulgate rules
substantially similar to applicable provisions of the FTC Rules adopted
pursuant to the Telemarketing Act.
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\12\ In response, the National Association of Securities Dealers
(``NASD''), the Municipal Securities Rulemaking Board (``MSRB''),
the New York Stock Exchange (``NYSE''), the American Stock Exchange
(``Amex''), the Philadelphia Stock Exchange (``Phlx''), and the
Chicago Board Options Exchange (``CBOE'') have adopted rules to curb
abusive telemarketing practices. See Securities Exchange Act Release
Nos. 38009 (Dec. 2, 1996) 61 FR 65625 (Dec. 13, 1996) (order
approving File No. SR-NASD-96-28); 38053 (Dec. 16, 1996) 61 FR 68078
(Dec. 26, 1996) (order approving File No. SR-MSRB-96-06); 38638 (May
14, 1997) 62 FR 27823 (May 21, 1997) (order approving File No. SR-
NYSE-97-07); 38724 (June 6, 1997) 62 FR 32390 (June 13, 1997) (order
approving File No. SR-Amex-97-17); 38875 (Jul. 25, 1997) 62 FR 41983
(Aug. 4, 1997) (order approving File No. SR-Phlx-97-18); and 39010
(Sep. 3, 1997) 62 FR 47712 (Sep. 10, 1997) (order approving File No.
SR-CBOE-97-39).
The Commission has determined that the NASD Rule, MSRB Rule, the
NYSE Rule, the Amex Rule, and the Phlx Rule, together with the Act
and the Investment Advisers Act of 1940, the rules thereunder, and
the other rules of the SROs, satisfy the requirements of the
Telemarketing Act because the applicable provisions of such laws and
rules are substantially similar to the FTC Rules except for those
FTC Rules that involve areas already extensively regulated by
existing securities laws or regulations or activities inapplicable
to securities transactions. Securities Exchange Act Release No.
38480 (Apr. 7, 1996) 62 FR 18666 (Apr. 16, 1996). Accordingly, the
Commission has determined that no additional rulemaking is required
by it under the Telemarketing Act. Id. Notwithstanding this
determination, the Commission still expects the Boston Stock
Exchange, the Cincinnati Stock Exchange, and the Chicago Exchange to
file similar proposals.
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Time Limitations and Disclosure. The proposed rule change adds new
Rule 9.20(b)(1) to prohibit a member or person associated with a member
from making outbound telephone calls to a member of the public's
residence for the purpose of soliciting the purchase of securities or
related services at any time other than between 8 a.m. and 9 p.m. local
time at the called person's location and to require, under proposed
paragraph (b)(2) to Rule 9.20, such member or associated person to
promptly disclose to the called person in a clear and conspicuous
manner the caller's identity and firm, the telephone number or address
at which the caller may be contacted, and that the purpose of the call
is to solicit the purchase of securities or related services.
Proposed paragraph (b)(3) to Rule 9.20 creates exemptions from the
time-of-day and disclosure requirements of paragraphs (1) and (2) for
telephone calls by associated persons, or other associated persons
acting at the direction of such persons for purposes of maintaining and
servicing existing customers assigned to or under the control of the
associated persons, to certain categories of ``existing customers.''
Proposed paragraph (3) defines ``existing customer'' as a customer for
whom the broker or dealer, or a clearing broker or dealer on behalf of
the broker or dealer, carries an account. Proposed subparagraph (3)(A)
exempts calls to an existing customer who, within the preceding twelve
months, has effected a securities transaction in, or made a deposit of
funds or securities into, an account under the control of or assigned
to the associated person at the time of the transaction or deposit.
Proposed subparagraph (3)(B) exempts calls to an existing customer who,
at any time, has effected a securities transaction in, or made a
deposit of funds or securities into, an account under the control of or
assigned to such associated person at the time of the transaction or
deposit, as long as the customer's account has earned interest or
dividend income during the preceding twelve months. Proposed
subparagraph (3)(C) exempts telephone calls to a broker or dealer. the
proposed rule change also expressly clarifies that the scope of this
rule is limited to the telemarketing calls described herein; the terms
of the Rule do not otherwise expressly or by implication impose on
members any additional requirements with respect to the relationship
between a member and a customer or between a person associated with a
member and a customer.
Demand Draft Authorization and Recordkeeping. The proposed rule
change adds Rule 9.20(d) to: (i) Prohibit a member or person associated
with a member from obtaining from a customer or submitting for payment
a check, draft, or other form of negotiable paper drawn on a customer's
checking, savings, share, or similar account (``demand draft'') without
that person's express written authorization, which may include the
customer's signature on the instrument; and (ii) require the retention
of such authorization for a period of three years.
Telemarketing Scripts. The proposed rule change also amends the
definition of ``sales literature'' contained in Rule 9.23 to include
``telemarketing scripts'' within that definition. This will require
telemarketing scripts to be retained for a period of three years.
2. Statutory Basis
The Exchange believes that the basis under the Act for the proposed
rule change is the requirement under Section 6(b)(5) \13\ that an
Exchange have rules that are designed to promote just and equitable
principles of trade, to remove impediments to, and perfect the
mechanism of, a free and open market and, in general, to protect
investors and the public interest.
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\13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change will impose no
burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.\14\
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\14\ The Commission, however, received two comment letters on a
NASD proposal (SR-NASD-96-28), which is substantially similar. See
Letter from Brad N. Bernstein, Assistant Vice President and Senior
Attorney, Merrill Lynch, to Jonathan G. Katz, Secretary, SEC, dated
Aug. 19, 1996 (``Merrill Lynch Letter''), and Letter from Frances M.
Stadler, Associate Counsel, Investment Company Institute (``ICI''),
to Jonathan G. Katz, Secretary, SEC, dated Aug. 21, 1996 (``ICI
Letter''). For a discussion of the letters and responses thereto,
see Securities Exchange Act Release No. 38009 (Dec. 2, 1996)
(approving File No. SR-NASD-96-28).
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III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of such filing will also be available for inspection
and copying at the principal office of the PCX. All submissions should
refer to File No. SR-PCX-97-36 and should be submitted by December 3,
1997.
IV. Commission's Findings and Order Granting Accelerated Approval of
the Proposed Rule Change
The Commission finds that the proposed rule change, as amended, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and, in particular, with Section 6(b)(5) of the Act \15\ which
requires, among other things, that the rules of the exchange be
designed to prevent further fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, and, in
general, to protect investors and the public interest.\16\ The proposed
rule change, as amended, is consistent with these objectives in that it
imposes time restriction and disclosure requirements, with certain
exceptions, on members' telemarketing calls, requires verifiable
authorization from a customer for demand drafts, and prevents members
from engaging in certain deceptive and abusive telemarketing acts and
practices while
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allowing for legitimate telemarketing activities.
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\15\15 U.S.C. 78f(b)(5).
\16\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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The Commission believes that the amendments to Rule 9.20,
prohibiting a member of person associated with a member from making
outbound telephone calls to the residence of any person for the purpose
of soliciting the purchase of securities or related services at any
time other than between 8 a.m and 9 p.m. local time at the called
person's location, without prior consent of the person, is appropriate.
The Commission notes that, by restricting the times during which a
member of a person associated with a member may call a residence, the
proposal furthers the interest of the public and provides for the
protection of investors by preventing members and member organizations
from engaging in unacceptable practices, such as persistently calling
members of the public at unreasonable hours of the day and night.
The Commission also believes that the amendments to Rule 9.20,
requiring a member of person associated with a member to promptly
disclose to the called person in a clear and conspicuous manner the
caller's identify and firm, telephone number or address at which the
caller may be contacted, and that the purpose of the call is to solicit
the purchase of securities or related services, are appropriate. By
requiring the caller to identify himself or herself and the purpose of
the call, the Rule assists in the prevention of fraudulent and
manipulative acts and practices by providing investors with information
necessary to make an informed decision about purchasing securities.
Moreover, by requiring the associated person to identify the firm for
which the caller is being contacted, the Rule encourages responsible
use of the telephone to market securities.
The Commission also believes that Rule 9.20, creating exemptions
from the time-of-day and disclosure requirements for telephone calls by
associated persons, or other associated persons acting at the direction
of such persons, to certain categories of ``existing customers'' is
appropriate. The Commission believes it is appropriate to create an
exemption for calls to customers with whom there are existing
relationships in order to accommodate personal and timely contact with
a broker who can be presumed to know when it is convenient for a
customer to respond to telephone calls. Moreover, such an exemption
also may be necessary to accommodate trading with customer in multiple
time zones across the United States. The Commission, however, believes
that the exemption from the time-of-day and disclosure requirements
should be limited to calls to persons with whom the broker has a least
a minimally active relationship. In this regard, the Commission
believes that Rule 9.20 achieves an appropriate balance between
providing protection for the public and the members' interest in
competing for customers.
The Commission also believes that the amendment to Rule 9.20,
requiring that a member or a person associated with a member obtain
from a customer, and maintain for three years, express written
authorization when submitting for payment a check, draft, or other form
of negotiable paper drawn on a customer's checking, savings, share or
similar account, is appropriate. The Commission notes that requiring a
member or person associated with a member to obtain express written
authorization from a customer in the above-mentioned circumstances
assists in the prevention of fraudulent and manipulative acts in that
it reduces the opportunity for a member or person associated with a
member to misappropriate customers' funds. Moreover, the Commission
believes that by requiring a member or person associated with a member
to retain the authorization for three years, Rule 9.20 protects
investors and the public interest in that it provides interested
parties with the ability to acquire information necessary to ensure
that valid authorization was obtained for the transfer of a customer's
funds for the purchase of a security.
The Commission also believes that the amendment to Rule 9.23
requiring the retention of telemarketing scripts for three years is
appropriate. By requiring the retention of telemarketing scripts for
three years, Rule 9.23 assists in the prevention of fraudulent and
manipulative acts and practices and provides for the protection of the
public in that interested parties will have the ability to acquire
copies of the scripts used to solicit the purchase of securities to
ensure that members and associated persons are not engaged in
unacceptable telemarketing practices.
Finally, the Commission believes that the proposed rule achieves a
reasonable balance between the Commission's interest in preventing
members from engaging in deceptive and abusive telemarketing acts and
the members' interest in conducting legitimate telemarketing practices.
The Commission finds good cause for approving the proposed rule
change, including Amendment Nos. 1 and 2, prior to the thirtieth day
after the date of publication of notice thereof in the Federal
Register. The proposal is identical to the NASD and MSRB rules, which
were published for comment and, subsequently, approved by the
Commission. The approval of the PCX's rules provides a consistent
standard across the industry. In that regard, the Commission believes
that granting accelerated approval to the proposed rule change is
appropriate and consistent with Section 6 of the Act.\17\
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\17\ 15 U.S.C. 78f.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-PCX-97-36), including
Amendment Nos. 1 and 2, is approved on an accelerated basis.
\18\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-29748 Filed 11-10-97; 8:45 am]
BILLING CODE 8010-01-M
