[Federal Register Volume 61, Number 249 (Thursday, December 26, 1996)]
[Notices]
[Pages 68078-68081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32721]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38053; File No. SR-MSRB-96-06]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Order Granting Approval to Proposed Rule Change and Notice of
Filing of, and Order Granting Accelerated Approval to, Amendment No. 1
to the Proposed Rule Change Relating to MSRB Telemarketing Rules
December 16, 1996.
I. Introduction
On July 30, 1996, the Municipal Securities Rulemaking Board
(``Board'' or ``MSRB'') submitted to the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend MSRB telemarketing rules
\3\ the proposed rule change was published for comment in the Federal
Register on September 7, 1996.\4\ No comments were received on the
proposal.\5\
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On Nov. 4, 1996, the MSRB filed Amendment No. 1 to its
proposal. Letter from Ronald W. Smith, Legal Associate, Municipal
Securities Rulemaking Board (``MSRB''), to George A. Villasana,
Attorney, Division of Market Regulation, SEC, dated Nov. 1, 1996.
\4\ See Securities Exchange Act Release No. 37626 (Aug. 30,
1996), 61 FR 47224 (Sept. 6, 1996) (notice of File No. SR-MSRB-96-
06).
\5\ The Commission, however, received two comment letters on an
NASD proposal, which is substantially similar. See Letter from Brad
N. Bernstein, Assistant Vice President & 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. Katx, Secretary, SEC, dated Aug. 21, 1996 (``ICI
better'').
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). In response to these letters, the MSRB
filed Amendment No. 1 to its proposal. See Amendment No. 1, supra
note 3.
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II. Background
Under the Telemarketing and Consumer Fraud and Abuse Prevention Act
(``Telemarketing Act''), which became law in August 1994,\6\ the
Federal Trade Commission adopted detailed regulations (``FTC Rules'')
\7\ to prohibit deceptive and abusive telemarketing acts and practices
that became effective on December 31, 1995.\8\ The FTC Rules, among
other things, (i) require the maintenance of ``do-not-call'' lists and
procedures, (ii) prohibit certain 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 or
herself, the company he or she works for, and the purpose of the call,
and (v) require express written authorization or other verifiable
authorization from the customer before the firm may use instruments
called ``demand drafts.'' \9\
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\6\ 15 U.S.C. Secs. 6101-08.
\7\ 16 CFR 310.
\8\ Secs. 310.3-4 of FTC Rules.
\9\ 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 identification 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 pre-approved'' in the
location where the customer's signature normally appears.
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Under the Telemarketing Act, the SEC is required either to
promugage or to require the 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 fair and orderly markets, or that existing
federal securities laws or SEC rules already provide for such
protection.
The MSRB believes it has implemented the prohibition against
certain abusive, annoying, or harassing telemarketing calls contained
in the FTC Rules by issuing an interpretation that such conduct is
violative of existing rules.\10\ The MSRB believes that the proposed
rule change addresses all
[[Page 68079]]
other relevant elements of the FTC Rules not covered by existing
federal securities laws and regulations.
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\10\ The Board implemented the requirement in (ii) referenced
above by issuing an interpretation that abusive telemarketing calls
are inconsistent with past and equitable principles of trade. See
MSRB Reports, Vol. 16, No. 3 (Sept. 1996).
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III. Description of the Proposals
Time Limitations and Disclosure
The proposed rule change adds rule G-39 to prohibit, under proposed
paragraph (a) to rule G-39, a broker, dealer or municipal securities
dealer or a person associated with a broker, dealer or municipal
securities dealer from making outbound telephone calls to the residence
of any person for the purpose of soliciting the purchase of municipal
securities or retailed services at any time other than between 8 a.m.
and 9 p.m. local time at the called person's location, without the
prior consent of the person, and to require, under proposed paragraph
(b) to rule G-39, such broker, dealer or municipal securities dealer or
a person associated with a broker, dealer or municipal securities
dealer 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 municipal securities or
related services.
Paragraph (c) to proposed rule G-39 creates exemptions from the
time-of-day and disclosure requirements of paragraphs (a) and (b) for
telephone calls by associated persons responsible for maintaining and
servicing accounts of certain ``existing customers'' assigned to or
under the control of the associated persons. Paragraph (c) defines
``existing customer'' as a customer for whom the broker, dealer or
municipal securities dealer, or a clearing broker or dealer on behalf
of such broker, dealer or municipal securities dealers, carries an
account. Proposed subparagraph (c)(i) exempts such calls, by an
associated person, 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 such associated person at the time of the transaction or
deposit. Proposed subparagraph (c)(ii) exempts such calls, by an
associated person, 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 the
associated person at the time of the transaction or deposit, as long as
the customer's account has earned interest or divided income during the
preceding twelve months. Each of these exemptions also permits calls by
other associated persons acting at the direction of an associated
person who is assigned to or controlling the account. Proposed
subparagraph (c)(iii) exempts telephone calls to a broker, dealer or
municipal securities 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 brokers, dealers or municipal
securities dealers any additional requirements with respect to the
relationship between a dealer and a customer or between a person
associated with a dealer and a customer.\11\
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\11\ See Amendment No. 1, Supra note 3.
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Do Not Call List
The proposed rule change amends rule G-8, on books and records, so
that each broker, dealer and municipal securities dealer that engages
in telephone solicitation to market its products and services is
required to make and maintain a centralized do-not-call list of persons
who do not wish to receive telephone solicitations from a broker,
dealer or municipal securities dealer or a person associated with a
broker, dealer or municipal securities dealer.\12\
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\12\ The NYSE, the NASD, the CBOE, the Amex, and the PSE also
adopted similar rules. See Securities Exchange Act Release Nos.
35821 (June 7, 1995), 60 FR 31337 (approving File No. SR-NYSE-95-
11); 35831 (June 9, 1995) 60 FR 56624 (approving File No. SR-CBOE-
95-63); 36748 (Jan. 19, 1996), 61 FR 2556 (approving File No. SR-
AMEX-96-01); and 37897 (Oct. 30, 1996), 61 FR 57937 (approving File
No. SR-PSE-96-32).
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Demand Draft Authorization and Recordkeeping
The proposed rule change also amends rule G-8, on books and
records, to prohibit a broker, dealer or municipal securities dealer or
municipal securities dealer or person associated with a broker, dealer
or municipal securities dealer 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. The proposed change to rule G-9, on preservation of
records, requires the retention of such authorization for a period of
three years. The proposal also states that this provision shall not,
however, require maintenance of copies of negotiable instruments signed
by customers.\13\
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\13\ See Amendment No. 1, supra note 3.
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Telemarketing Scripts
The proposed rule change amends rule G-21 to include ``electronic''
messages sent via computer and ``telemarketing scripts'' within the
definition of ``advertisement.'' The inclusion of the term
``electronic'' within the definition of ``advertisement'' is intended
to apply to communication available to all network subscribers
including items displayed over network bulletin boards, and it is
intended to apply to messages sent directly to individuals or targeted
groups. Therefore, the associated record retention requirement for
`'advertisements'' contained in the proposed change to rule G-
9(b)(xiii), on record retention, will require dealers to retain
telemarketing scripts for three years.
IV Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to the Board, and, in particular, with Section
15B(b)(c)(C) of the Act \14\ which requires, among other things, that
the rules of the Board be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.\15\ The proposed rule change 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,
requires the maintenance of a do-not-call list, requires the retention
for three years of all substantially different telemarketing scripts,
and prevents members from engaging in certain deceptive and abusive
telemarketing acts and practices while allowing for legitimate
telemarketing practices. The Commission believes that the addition of
rule G-39, prohibiting a broker, dealer or person associated with a
broker, dealer or municipal securities dealer from making outbound
telephone calls to the residence of any person for the purpose of
soliciting the purchase of municipal 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 the prior consent of the person, is
appropriate.
[[Page 68080]]
The Commission notes that, by restricting the times during which a
broker, dealer or municipal securities dealer or person associated with
a broker, dealer or municipal securities dealer may call a residence,
the Rules furthers the interest of the public and provides for the
protection of investors by preventing brokers, dealers and municipal
securities dealers from engaging in unacceptable practices, such as
persistently calling members of the public at unreasonable hours of the
day and night.
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\14\ 15 U.S.C. Sec. 78o-4.
\15\ In approving these rules, the Commission has considered the
proposed rules' impact on efficiency, competition, and capital
formation. 15 U.S.C. Sec. 78c(f).
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The Commission also believes that the addition of rule G-39,
requiring a broker, dealer or municipal securities dealer or person
associated with a broker, dealer or municipal securities dealer to
promptly disclose to the called person in a clear and conspicuous
manner the caller's identity 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 municipal securities or related services, is
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 when purchasing
municipal securities. Moreover, by requiring the associated person to
identify the firm for which he or she works and the telephone number or
address at which the caller may be contacted, the rule encourages
responsible use of the telephone to market municipal securities.
The Commission also believes that rule G-39, 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, dealer or municipal securities dealer 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 customers 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, dealer or municipal securities dealer has a
minimally active relationship. In this regard, the Commission believes
that rule G-39 achieves an appropriate balance between providing
protection for the public and the municipal brokers' and dealers'
interest in competing for customers.
The Commission also believes that the amendment to rule G-8,
requiring that a broker, dealer or municipal securities dealer or
person associated with a broker, dealer or municipal securities dealer
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 by requiring
a broker, dealer and municipal securities dealer or person associated
with a broker, dealer or municipal securities dealer 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 broker, dealer or
municipal securities dealer or person associated with a broker, dealer
or municipal securities dealer to misappropriate customers' funds.
Moreover, the Commission believes that by requiring brokers, dealers
and municipal securities dealers or persons associated with a broker,
dealer or municipal securities dealer to retain the authorization for
three years, rule G-8 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 municipal
security.
The Commission also believes that the amendment to rule G-8,
requiring that each broker, dealer and municipal securities dealer
maintain a centralized do-not-call list of persons who do not wish to
receive telephone solicitations from the broker, dealer or municipal
securities dealer or its associated persons, is appropriate. By
requiring brokers, dealers and municipal securities dealers to maintain
a do-not-call list, rule G-8 assists in the prevention of fraudulent
and manipulative acts and practices, such as persistently calling
investors who have expressed a desire not to receive telephone
solicitations.
The Commission also believes that the amendments to rules G-9 and
G-21, requiring every broker, dealer and municipal securities dealer to
retain for three years from the date of each use each advertisement
published or designed for distribution to the public, including, among
other things, electronic media and telemarketing scripts, is
appropriate. By requiring brokers, dealers and municipal securities
dealers to retain advertisements for three years, rules G-9 and G-21
assist in the prevention of fraudulent and manipulative acts and
practices and provide for the protection of the public in that they
provide interested parties with the ability to acquire copies of the
advertisements used to solicit the purchase of municipal securities to
ensure that brokers, dealers and municipal securities dealers 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 Amendment No. 1 prior
to the thirtieth day after the date of publication of notice thereof in
the Federal Register. Amendment No. 1 simply clarifies portions of the
proposed Rule and does not raise any significant regulatory concerns.
Therefore, the Commission believes that granting accelerated approval
to Amendment No. 1 is appropriate and consistent with Section 15B and
Section 19(b)(2) of the Act.
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth, N.W., Washington, DC
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. Copies of such filing will also be
available for inspection and copying at the principal office of the
MSRB. all submissions should refer to File No. SR-MSRB-96-06 and should
be submitted by January 15, 1997.
[[Page 68081]]
V. Conclusion
It is Therefore ordered, pursuant to Section 19(b)(2) of the Act,
\16\ that the proposed rule change (SR-MSRB-96-06), as amended, is
approved.
\16\ 15 U.S.C. Sec. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12)(1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-32721 Filed 12-24-96; 8:45 am]
BILLING CODE 8010-01-M
