[Federal Register Volume 62, Number 73 (Wednesday, April 16, 1997)]
[Notices]
[Pages 18666-18669]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-9712]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38480]
Telemarketing and Consumer Fraud and Abuse Prevention Act;
Determination that No Additional Rulemaking Required
April 7, 1997.
A. Background
The Telemarketing and Consumer Fraud and Abuse Prevention Act (the
``Telemarketing Act'') \1\ requires the Commission to promulgate, or
require the securities industry self-regulatory organizations
(``SROs'') to promulgate, rules substantially similar to the rules
adopted by the Federal Trade Commission (``FTC'') pursuant to the
Telemarketing Act (the ``FTC'').\2\ The purpose of these rules is to
prohibit deceptive and other abusive telemarketing acts or practices by
brokers, dealers, and other securities industry professionals.\3\ the
Telemarketing Act provides that the Commission may elect not to
promulgate such rules only if it determines that existing rules provide
protection against deceptive and abusive practices in securities
transactions that is substantially similar to that provided by the FTC
Rules, or that additional rules are not necessary or appropriate in the
public interest.\4\
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\1\ 15 U.S.C. 6101-08 (1996).
\2\ Section 3(d)(1)(a) of the Telemarketing Act provides that
``not later than 6 months after the effective date of the rules
promulgated by the Federal Trade Commission under subsection (a) [of
Section 3 of the Telemarketing Act], the Securities and Exchange
Commission shall promulgate, or require any national securities
exchange or registered securities association to promulgate, rules
substantially similar to such rules to prohibit deceptive and other
abusive telemarketing acts or practices described in paragraph (2)
[of Section 3(d)].'' 15 U.S.C. 6102(d)(1)(a) (1996). The FTC adopted
the FTC Rules on August 23, 1995, with an effective date of December
31, 1995. 60 FR 43842 (codified at 16 CFR 310.1-310.8 (1996)). The
proposed NASD Rule was filed with the Commission on June 28, 1996.
See Securities Exchange Act Release No. 37475 (July 30, 1996).
\3\ Section 3(d)(2)(A) of the Telemarketing Act provides that
``[t]he rules promulgated by the Securities and Exchange Commission
under paragraph (1)(a) shall apply to a broker, dealer, transfer
agent, municipal securities dealer, municipal securities broker,
government securities broker, government securities dealer,
investment adviser or investment company, or any individual
associated with [any of the foregoing].'' 15 U.S.C. 6102(d)(2)(A)
(1996). The Telemarketing Act defines such terms by reference to the
Securities Exchange Act of 1934, the Investment Advisers Act of
1940, and the Investment Company Act of 1940, and explicitly states
that the FTC Rules shall not apply to such persons.
\4\ Section 3(d)(1)(B) of the Telemarketing Act provides that
``[t]he Securities and Exchange Commission is not required to
promulgate a rule under [Section 3(d)(1)(A)] if it determines that--
(i) Federal securities laws or rules adopted by the Securities and
Exchange Commission thereunder provide protection from deceptive and
other abusive telemarketing by persons described in [Section
3(d)(2)] substantially similar to that provided by rules promulgated
by the Federal Trade Commission under [Section 3(a)]; or (ii) such a
rule promulgated by the Securities and Exchange Commission is not
necessary or appropriate in the public interest, or for the
protection of investors, or would be inconsistent with the
maintenance of fair and orderly markets.'' 15 U.S.C. 6102(d)(1)(B)
(1996).
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In early 1996, members of the staff of the Division of Market
Regulation conducted a series of meetings and conferences with
representatives of the National Association of Securities Dealers, Inc.
(``NASD'') and other major SROs to discuss the requirements of the
Telemarketing Act. As a result, the NASD filed a proposed rule change
(the ``NASD Rule'') \5\ with the Commission for approval. Shortly
thereafter, the Municipal Securities Rulemaking Board (``MSRB'') filed
a substantially similar proposed rule change (the ``MSRB Rule'') \6\
with the Commission. The staff, by delegated authority, approved the
[[Page 18667]]
NASD rule on December 2, 1996,\7\ and the MSRB Rule on December 16,
1996.\8\
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\5\ the NASD Rule, SR-NASD-96-28, initially was filed with the
Commission on June 28, 1996, and subsequently was amended by the
NASD on July 18, 1996, July 24, 1996, and October 18, 1996. See
Securities Exchange Act Release No. 37475 (July 24, 1996).
\6\ The MSRB filed the MSRB Rule, SR-MSRB-96-6, with the
Commission for approval on July 30, 1996. See Securities Exchange
Act Release No. 37626 (Aug. 30, 1996). The MSRB amended its rule
filing on November 1, 1996.
\7\ See Securities Exchange Act Release No. 38009 (Dec. 2,
1996).
\8\ See Securities Exchange Act Release No. 38053 (Dec. 16,
1996).
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As discussed below, the Commission finds that the Securities
Exchange Act of 1934 (the ``Exchange Act'') and the Investment Advisers
Act of 1940 (the ``Advisers Act''), the rules thereunder, and the other
rules of the SROs (including the NASD Rule and the MSRB Rule), 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. Accordingly, the
Commission has determined that no additional rulemaking is required by
it under the Telemarketing Act. In accordance with Section 3(d)(1)(B)
of the Telemarketing Act, the Commission is publishing this
determination in the Federal Register, together with the reasons
therefor.\9\
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\9\ Section 3(d)(1)(B) of the Telemarketing Act provides that,
if the Commission determines that no additional rulemaking is
required, it ``shall publish in the Federal Register its
determination with the reasons for it.'' 15 U.S.C. 6102(d)(1)(B)
(1996).
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B. Discussion
The FTC Rules address three areas: (1) Abusive telemarketing acts
or practices, which are addressed through a requirement to maintain a
do-not-call list, calling time restrictions, required oral disclosures,
and proscriptions against the use of threats, intimidation, profane or
obscene language, and certain repetitive calling patterns; (2)
deceptive telemarketing acts or practices, which are addressed
primarily through required disclosures about the goods or services
being offered and prohibitions against misrepresentations with respect
thereto; and (3) recordkeeping requirements relating to various aspects
of telemarketing transactions.
1. Abusive Telemarketing Acts or Practices
Section 310.4 of the FTC Rules proscribes a number of ``abusive
telemarketing acts or practices'' by telemarketers. First, the FTC
Rules effectively require the maintenance of do-not-call lists by
telemarketers. Second, time-of-day restrictions prohibit cold-calls
prior to 8 a.m. or after 9 p.m. local time at the called person's
location. Third, telemarketers are required to disclose orally to the
called person the caller's identity, that the purpose of the call is to
sell goods or services, the nature of the goods or services being
offered, and, if a prize promotion is involved, that no purchase is
necessary to participate therein. Fourth, telemarketers are prohibited
from using threats or intimidation, profane or obscene language, or
certain repetitive calling patterns, in connection with telemarketing
transactions. Finally, the FTC Rules prohibit a telemarketer from
receiving payment in advance from a consumer for (1) Cleansing a credit
report, (2) Obtaining a refund or goods promised with respect to a
prior telemarketing transaction, or (3) Arranging a loan or other
extension of credit.
With respect to the do-not-call list requirement, the New York
Stock Exchange (``NYSE''), the NASD, the Chicago Board Options Exchange
(``CBOE''), the American Stock Exchange (``AMEX''), and the Pacific
Stock Exchange (``PSE'') have each adopted rules that require all
members to make and maintain a centralized do-not-call list.\10\
Further, the MSRB Rule includes a provision requiring municipal
securities brokers and dealers to maintain a do-not-call list.\11\
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\10\ NYSE Rule 440A; NASD Rule 3110(g); CBOE Rule 9.24; AMEX
Rule 428; PSE Rule 9.20(b).
\11\ MSRB rule G-8(a)(xix)(A).
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Certain other abusive telemarketing acts or practices proscribed by
the FTC Rules, which are addressed by the calling time restrictions and
required oral disclosures, are covered by the NASD Rule and the MSRB
Rule.\12\ Both the NASD Rule and the MSRB Rule, with certain limited
exceptions, (a) prohibit cold-calls 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 called person,\13\ and (b) require the cold-caller
to identify himself and his firm, provide a name or address at which
the caller may be contacted, and state that the purpose of the call is
to sell securities.\14\
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\12\ Virtually all registered broker-dealers that conduct a
public business (i.e., those that potentially may engage in
telemarketing activities) are NASD members or municipal securities
dealers, and accordingly are subject either to the NASD Rule or the
MSRB Rule.
\13\ NASD Rule 2211(a); MSRB rule G-39(a).
\14\ NASD Rule 2211(b); MSRB rule G-39(b).
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A third group of abusive telemarketing acts or practices proscribed
by the FTC Rules, namely the use of threats, intimidation, profane or
obscene language, and certain repetitive calling patterns, are
prohibited specifically by recent NASD and MSRB interpretations. The
NASD and MSRB have each issued an interpretation of their general rule
proscribing conduct inconsistent with just and equitable principles of
trade or fair dealing, clarifying that such proscribed conduct includes
(a) Threats, intimidation, and the use of profane or obscene language,
and (b) calling a person repeatedly with intent to annoy, abuse, or
harass the called party.\15\
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\15\ See NASD Notice to Members 96-44 (July 1996) (conduct
inconsistent with NASD Rule 2110); MSRB Reports, Vol. 16, No. 3
(September 1996) (conduct inconsistent with MSRB rule G-17).
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Finally, certain specific abusive telemarketing acts or practices
addressed by the FTC Rules do not appear applicable to securities
transactions. The FTC Rules addressing the receipt of payment in
advance for cleansing a credit report, obtaining refunds, or arranging
a loan, are included in this category.
2. Deceptive Telemarketing Acts or Practices
Section 310.3 of the FTC Rules prohibits a number of ``deceptive
telemarketing acts or practices'' by telemarketers, and primarily
requires specified disclosures and prohibits misrepresentations. First,
the telemarketer must disclose the following information, in a clear
and conspicuous manner, prior to payment by a customer for the goods or
services offered: (1) The quantity of goods or services involved and
the total cost thereof; (2) All material restrictions, limitations, or
conditions with respect thereto; (3) All material terms and conditions
of the seller's refund, cancellation, exchange, or repurchase policy,
or the lack thereof; (4) In a prize promotion, the odds of receiving
the prize, that no purchase or payment is required to participate, and
instructions on how to participate; and (5) in a prize promotion, all
material costs or conditions to redeem the prize that is the subject
thereof. Second, a telemarketer may not make any false or misleading
statement to induce any person to pay for goods or services, and
misrepresentation by a telemarketer, directly or by implication,
specifically is prohibited with respect to (1) Any of the required
disclosure items described above; (2) Any material aspect of the
performance, efficacy, nature, or central characteristics of the goods
or services offered; (3) Any material aspect of an investment
opportunity including, but not limited to, risk, liquidity, earnings
potential, or profitability; and (4) A seller's or telemarketer's
affiliation with, or endorsement by, any government or third-party
organization. Third, a telemarketer may not obtain or submit for
payment a check, draft, or other form
[[Page 18668]]
of negotiable paper drawn on a customer's bank or other account without
the customer's express verifiable authorization, and credit card
laundering (i.e., having a third party present a credit card sales
draft) is prohibited in connection with a telemarketing transaction.
Finally, no person may provide substantial and knowing assistance with
respect to a violation of any of the FTC Rules.
One of the deceptive telemarketing acts or practices proscribed by
the FTC Rules, namely the unauthorized use of demand drafts,
specifically is addressed by the NASD Rule and the MSRB Rule. Both the
NASD Rule and the MSRB Rule prohibit the cold-caller from utilizing a
demand draft without the customer's express verifiable
authorization.\16\
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\16\ NASD Rule 3110(g)(2); MSRB rule G-8(a)(xix)(B).
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Certain of the deceptive telemarketing acts or practices proscribed
by the FTC Rules, namely those addressing prize promotions and credit
card laundering, are not applicable to securities transactions.
The remaining deceptive telemarketing acts or practices proscribed
by the FTC Rules involve areas already extensively regulated by
existing securities laws and regulations. The FTC Rules that proscribe
deceptive telemarketing acts or practices primarily (1) Require the
disclosure of certain information with respect to the goods or services
being offered, and (2) prohibit misrepresentations with respect
thereto. However, Section 9(a) of the Exchange Act,\17\ section 10(b)
of the Exchange Act and the rules promulgated thereunder,\18\ Sections
15(c) and 15(g) of the Exchange Act and the rules promulgated
thereunder,\19\ and the related antifraud rules of the SROs,\20\
extensively regulate disclosure and prohibit misrepresentations in
connection with the offer and sale of securities. Therefore, the more
limited regulations addressing required disclosures and prohibited
misrepresentations set forth in the FTC Rules and applicable to non-
securities transactions are unnecessary or inappropriate in the
securities context in light of the more extensive existing regulatory
framework.
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\17\ Section 9(a)(4) of the Exchange Act prohibits a broker or
dealer, in connection with the purchase or sale of any security
registered on a national securities exchange, from making ``any
statement which was at the time and in the light of the
circumstances under which it was made, false or misleading with
respect to any material fact, and which he knew or had reasonable
ground to believe was so false or misleading.''
\18\ Section 10(b) of the Exchange Act proscribes the use, in
connection with the purchase or sale of any security, of ``any
manipulative or deceptive device or contrivance'' in contravention
of the rules and regulations promulgated by the Commission. Rule
10b-5 under the Exchange Act, for example, makes it unlawful for
``any person, directly or indirectly, . . . (a) to employ any
device, scheme, or artifice to defraud, (b) to make any untrue
statement of a material fact or to omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which they were made, not misleading, or (c) to engage in any
act, practice, or course of business which operates or would operate
as a fraud or deceit upon any person, in connection with the
purchase or sale of any security.'' In addition, Rule 10b-10 under
the Exchange Act generally requires a broker-dealer to give or send
to its customer, at or before the completion of a securities
transaction, a written notification disclosing, among other things,
the date of the transaction, the identity, price, and number of
shares or units (or principal amount) of the security purchased or
sold, whether the broker-dealer acted as principal or agent in the
transaction, and the fees paid to, or markup received by, the
broker-dealer in connection therewith.
\19\ Sections 15(c)(1) and 15(c)(2) of the Exchange Act, among
other things, prohibit brokers, dealers, municipal securities
dealers, and government securities brokers and dealers from
effecting transactions in, or inducing or attempting to induce the
purchase or sale of, securities by means of any manipulative,
deceptive, or other fraudulent device or contrivance. With respect
to non-municipal or non-government securities brokers or dealers,
the foregoing is limited to transactions otherwise than on a
national securities exchange of which such broker or dealer is a
member (in which case Section 9(a)(4) of the Exchange Act would
apply). The rules promulgated by the Commission pursuant thereto
define the prohibited activities in more detail. For example, Rule
15c1-2 under the Exchange Act defines these proscribed activities as
including ``any act, practice, or course of business which operates
or would operate as a fraud or deceit upon any person'' and ``any
untrue statement of a material fact and any omission to state a
material fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not
misleading, which statement or omission is made with knowledge or
reasonable grounds to believe it is untrue or misleading.'' Rule
15c2-8 sets forth certain prospectus delivery requirements for
brokers and dealers participating in certain distributions of
securities with respect to which a registration statement has been
filed under the Securities Act of 1933. Section 15(g) of the
Exchange Act and Rules 15g-2 and 15g-9 thereunder, among other
things, prohibit a broker or dealer from effecting certain
transactions in ``penny stocks'' (generally, securities with a price
of less than $5 per share or unit that are not traded on an exchange
or on NASDAQ) unless the broker or dealer first (1) has delivered a
risk disclosure document to the customer, (2) has made certain
suitability determinations and delivered to the customer a written
statement setting forth the basis therefore, and (3) has received
from the customer the customer's written agreement to the
transaction.
\20\ E.g., NASD Rule 2120; NYSE Rule 476; MSRB rule G-17.
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3. Recordkeeping Requirements
The FTC Rules require that the following records be kept by
telemarketers with respect to their telemarketing activities for a
period of 24 months: (1) Copies of all substantially different
advertising, brochures, telemarketing scripts, and promotional
materials; (2) the name and address of each customer, the product or
service purchased, the price paid, and the date shipped or provided;
(3) the name, address, telephone number, and job title of each current
and former employee directly involved in telephone sales; (4) the name
and address of each recipient of a prize with a value of at least $25,
and a description of such prize; and (5) all verifiable authorizations
required in connection with the submission of any demand drafts
described above.
Both the NASD Rule and the MSRB Rule require the retention of any
express verifiable authorization obtained in connection with the use of
a demand draft for a period of three years.\21\ As noted above, the FTC
Rules addressing prize promotions are not applicable to securities
transactions.
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\21\ NASD Rule 3110(g)(3); MSRB rule G-9(b)(xii).
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The remaining recordkeeping requirements of the FTC Rules are
unnecessary in the securities context given the more extensive
recordkeeping requirements imposed upon broker-dealers by the Exchange
Act and existing SRO rules. Rule 17a-3 under the Exchange Act requires
a broker-dealer to maintain certain records, including detailed records
of all transactions in securities effected by, and all salespersons
employed by, such broker-dealer.\22\ Rule 17a-4 under the Exchange Act
requires, among other things, such records, as well as copies of all
communications sent by a broker-dealer relating to its business (which
would include advertisements and sales literature),\23\ to be retained
by the broker-dealer for varying periods, but in no case less than
three years. Existing rules of the SROs, in general, also contain
comparable recordkeeping requirements.\24\
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\22\ For example, Rule 17a-3(a)(1) under the Exchange Act
provides that broker-dealers shall make and keep current
``[b]lotters (or other records of original entry) containing an
itemized daily record of all purchases and sales of securities, all
receipts and deliveries of securities (including certificate
numbers), all receipts and disbursements of cash and all other debts
and credits. Such records shall show the account for which each such
transaction was effected, the name and amount of securities, the
unit and aggregate purchase or sale price (if any), the trade date,
and the name or other designation of the person from whom purchased
or received or to whom sold or delivered.'' Rule 17a-3(a)(12)
requires broker-dealers to maintain detailed information with
respect to each associated person (which includes any salesman or
employee soliciting transactions or accounts) of such broker-dealer.
\23\ Telemarketing scripts expressly are included within the
definitions of ``sales literature'' or ``advertisement'' in both the
NASD and MSRB rules. See NASD Rule 2210(a)(2); MSRB rule G-21(a).
\24\ See, e.g., NASD Rules 2210 and 3110; NYSE Rules 410 and
472.
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[[Page 18669]]
4. Investment Companies and Investment Advisers
Most investment company securities are sold through registered
broker-dealers that are required by the Exchange Act to be members of
the NASD and are subject to NASD rules. Separate rulemaking under the
Investment Company Act of 1940 covering the telemarketing of investment
company securities by NASD members would be largely duplicative of the
NASD Rule and would not provide additional protections to consumers.
A small minority of investment companies are ``self-distributed''
(i.e., the investment company sells its share to the public directly
and not through a registered broker-dealer). The sale of these
companies' securities are not covered by NASD rules. Under Exchange Act
Rule 3a4-1, however, unsolicited telemarketing by self-distributed
investment companies generally is prohibited.\25\ Because telemarketing
by self-distributed investment companies is already restricted by Rule
3a4-1, additional rulemaking appears unnecessary.
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\25\ Rule 3a4-1 provides an exclusion from the definition of
``broker'' for certain persons associated with issuers of
securities. Self-distributed investment companies operate without
NASD membership pursuant to this rule. Rule 3a4-1(a)(4)(iii)
prohibits ``oral solicitations'' of ``potential purchasers.''
Investment company personnel may respond, however, ``to inquiries of
a potential purchaser in a communication initiated by the potential
purchaser in a communication initiated by the potential purchaser''
as long as the response is limited to information contained in the
investment company's prospectus.
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Investment advisers infrequently employ telemarketing to obtain
advisory clients. Unlike the sale of a single security or other
products and services, the service provided by an investment adviser
typically involves an ongoing personal relationship that cannot easily
be established over the telephone. Moreover, the Advisers Act and
Commission rules thereunder provide procedural safeguards that have the
effect of deterring abusive telemarketing by advisers. For example,
Rule 204-3 generally requires a registered investment adviser to
provide to a prospective client a written disclosure statement
containing specified information concerning its personnel, investment
strategies and methods, the services provided and the fees charged (1)
At least 48 hours before entering into an investment advisory contract,
or (2) At the time the contract is entered into, if the client has the
right to terminate the contract without penalty within five business
days.\26\
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\26\ Rule 204-3 does not require a disclosure statement for a
``contract for impersonal advisory services'' involving a payment of
less than $200. Impersonal advisory services include (1) general
information or recommendations not tailored for a specific client,
and 92) statistical information that does not make a recommendation
regarding a particular security. Neither the Division of Investment
Management nor the Office of Compliance Inspections and Examinations
is aware of any instances in which impersonal advisory services have
been sold to consumers through unsolicited telemarketing.
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Unsolicited telemarketing is not, however, prohibited by the
Advisers Act or the rules thereunder. Although the Commission does not
believe that specific rules are warranted at this time, it will monitor
the implementation and effectiveness of the NASD Rule and consider
whether similar rules are necessary to deter the development of abusive
telemarketing practices by the investment advisory industry.
C. Conclusion
The Commission finds that the NASD Rule and MSRB Rule, together
with the Exchange Act and the Advisers Act, 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,\27\ except for those
FTC Rules that involve areas already extensively regulated by existing
securities laws or regulations or activities inapplicable to securities
transactions.\28\ Accordingly, the Commission has determined that no
additional rulemaking is required by it under the Telemarketing Act.
\27\ The Commission finds that such laws and rules provide
protection from deceptive and other abusive telemarketing acts and
practices by persons described in Section 3(d)(2) of the
Telemarketing Act substantially similar to that provided by the FTC
Rules. See Section 3(d)(1)(B)(i) of the Telemarketing Act, 15 U.S.C.
6102(d)(1)(B)(i) (1996).
\28\ With respect to those FTC Rules that involve areas already
extensively regulated by existing securities laws or regulations, or
activities inapplicable to securities transactions, the Commission
finds that the promulgation of substantially similar rules is not
necessary or appropriate in the public interest. See Section
3(d)(1)(B)(ii) of the Telemarketing Act, 15 U.S.C. 6102(d)(1)(B)(ii)
(1996).
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By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-9712 Filed 4-15-97; 8:45 am]
BILLING CODE 8010-01-M
