[Federal Register Volume 61, Number 147 (Tuesday, July 30, 1996)]
[Notices]
[Pages 39686-39688]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19296]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37475;File No. SR-NASD-96-28]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1 and 2 Thereto by the National Association
of Securities Dealers, Inc. (``NASD'' or ``Association'') Relating to
Telemarketing Rules
July 24, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on June 28, 1996, the
National Association of Securities Dealers, Inc. (``NASD'' or
``Association'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. On July 18, 1996, the NASD filed Amendment No.
1 to its proposal.\2\ On July 24, 1996, the NASD filed Amendment No. 2
to its proposal.\3\ The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ In Amendment No. 1, the NASD withdrew its request for
approving the proposed rule change prior to the 30th day after
publication in the Federal Register; added the word ``do'' after the
word ``who'' in subparagraph (g)(1) to Rule 3110; and added the
phrase ``or person associated with a member'' after the word
``member'' in subparagraph (g)(2) to Rule 3110. See Letter from John
Ramsay, Deputy General Counsel, NASD Regulation, Inc. (``NASDR''),
to Katherine A. England, Assistant Director, Division of Market
Regulation, SEC, dated July 18, 1996
\3\ In Amendment No. 2, the NASD replaced the phrase ``or a
person acting at the direction of a person associated with a
member,'' with ``or another associated person acting at the
direction of such person'' in subparagraph (c) to Rule 2211 to
clarify that the exceptions to the requirements of paragraphs (a)
and (b) of Rule 2211, as proposed, apply only to a person associated
with a member or another associated person acting at the direction
of such associated person. See Letter from John Ramsay, Deputy
General Council, NASDR, to Katherine A. England, Assistant Director,
Division of Market Regulation, SEC, dated July 24, 1996.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Below is the text of the proposed rule change. Proposed new
language is italicized; proposed deletions are in brackets.
Conduct Rules
2000. Business Conduct
* * * * *
2200. Communications With Customers and the public
2211. Telemarketing
No member or person associated with a member shall:
(a) Make 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 the prior consent of the person;
or
(b) Make an outbound telephone call to any person for the purpose
of soliciting the purchase of securities or related services without
disclosing promptly and in a clear and conspicuous manner to the called
person the following information:
(1) The identity of the caller and the member firm;
(2) The telephone number or address at which the caller may be
contacted; and
(3) That the purpose of the call is to solicit the purchase of
securities or related services.
(c) The prohibitions of paragraphs (a) and (b) shall not apply to
telephone calls by any person associated with a member, or another
associated person acting at the direction of such person for the
purpose of maintaining and servicing the accounts of existing customers
of the member under the control of or assigned to such associated
person:
(1) 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 that, at the time of the
transaction or the deposit, was under the control of or assigned to,
such associated person;
(2) To an existing customer who previously has effected a
securities transaction in, or made a deposit of funds or securities
into, an account that, at the time of the transaction or deposit, was
under the control of or assigned to, such associated person, provided
that such customer's account has earned interest or divided income
during the preceding twelve months; or
(3) To a broker or dealer. For the purposes of paragraph (c), the
term ``existing customer'' means a customer for whom the broker or
dealer, or a clearing broker or dealer on behalf of such broker or
dealer, carries an account.
* * * * *
3000. Responsibilities Relating to Associated Persons, Employees, and
Others' Employees
* * * * *
3100. Book and Records, and Financial Condition
3110. Books and Records
* * * * *
(g) [Cold Call] Telemarketing Requirements
(1) Each member shall make and maintain a centralized do-not-call
list of persons who do not wish to receive telephone solicitations from
such member or its associated person.
(2) No member or person associated with a member shall obtain from
a customer or submit for payment a check, draft, or other form of
negotiable paper drawn on a customer's checking, savings, share, or
similar account, without that person's express written authorization,
which may include the customer's signature on the negotiable
instrument.
(3) Each member shall maintain the authorization required by
subparagraph (2) for a period of three years.
II. Self-Regulatory Organizations Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the NASD 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 IV below. The NASD 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
Introduction and Background. Pursuant to the Telephone Consumer
Protection Act (``TCPA''),\4\ the NASD adopted in June 1995, a ``cold
call'' rule to implement certain rules of the Federal Communications
Commission (``FCC Rule'') \5\ that require persons who
[[Page 39687]]
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 called (a ``do not-
call'' list).\6\ Under the Telemarketing and Consumer Fraud and Abuse
Prevention Act (``Telemarketing Act''), which became law in August
1994,\7\ the Federal Trade Commission adopted detailed regulations
(``FTC Rules'') 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 abusive, annoying, or
harassing telemarketing calls, (iii) prohibit telemarketing call 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.'' \9\ While the FCC and FTC Rules are applicable to members
that engage in telephone solicitation to market their products and
services, those regulations cannot be enforced by either the Securities
and Exchange Commission (``SEC'') or the securities self-regulatory
organizations (``SROs''). Under the Telemarketing Act, the SEC is
required either to promulgate 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 orderly markets, or that
existing federal securities laws or SEC rules already provide for such
protection.\10\ The staff of the SEC has advised that it believes that
additional rulemaking is necessary to satisfy the requirements of the
Telemarketing Act. The NASD believes that, because the SROs will be the
primary enforcers of these rules, it may be more appropriate to require
the SROs individually to adopt separate rules than for the SEC to adopt
the rules for the entire industry. In addition, these rules relate to
the regulation of sales practices which the NASD believes it should
take the lead in promulgating and enforcing. The NASD intends to
implement requirement (ii) by issuing an interpretation that such
conduct is violative of existing rules and implement requirements
(iii)--(v) by amending their rules.\11\ In order to approve the
proposed rule change in accordance with the Telemarketing Act, the SEC
must determine that the rule, together with existing federal securities
laws and regulations, provide protection substantially similar to the
FTC Rules.
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\4\ 47 U.S.C. Sec. 227.
\5\ 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 C.F.R. Sec. 64.1200). With certain limited
exceptions, the FCC Rules apply 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.
\6\ Securities Exchange Act Release No. 35831 Jun. 9, 1995, 60
FR 31527 (Jun. 15, 1995) (order approving File No. SR-NASD-95-13).
\7\ 15 U.S.C. Secs. 6101-08
\8\ Secs. 310.3-4 of FTC Rules.
\9\ Id.
\10\ Specifically, Section 3(d)(1)(B) of the Telemarketing Act
provides that the 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 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) a rule promulgated by the 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.
Sec. 6102(d)(1)(B).
\11\ The SEC staff requested that the SROs implement the
requirement in (ii) referenced above by issuing an interpretation
that abusive telemarketing calls are inconsistent with just and
equitable principles of trade. At its May 1996 meeting, the NASDR
Board authorized a Notice to Members (``NTM'') that sets forth the
interpretation that abusive communications from members or
associated persons of members to customers is a violation of Rule
2110 of the NASD's Conduct Rules. The NASDR published this NTM in
July 1996. NTM 96-44 (July 1996).
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Description of Proposed Amendments. Time Limitations and
Disclosure. The proposed rule change adds new Rule 2211 to Rule 2200 of
the NASD's Conduct Rules to prohibit, under proposed paragraph (a) to
Rule 2211, 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) to Rule
2211, such member or associated person to promptly disclose to the
called person in a clear and conspicuous manner the caller's identityy
and firm, the telephone number or address at which the caller may be
contacted, and that the purpose of the call to solicit the purchase of
securities or related services.
Proposed paragraph (c) to Rule 2211 creates exemptions from the
time-of-day and disclosure requirements of paragraphs (a) and (b) 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.''
Paragraph (c) 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 (c)(1)
exempts such 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 such associated person at the time of the transaction or
deposit. Proposed subparagraph (c)(2) exempts such 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 the 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 paragraph
(c)(3) exempts telephone calls to a broker or dealer.
Subparagraphs (c) (1) and (2) together exclude only some calls to
existing customers from the time-of-day and disclosure requirements of
the proposed rule. An associated person, or a person acting at the
direction of such associated person, may contact a customer without
complying with the requirements of the rule if the customer has
effected a transaction or made a deposit during the past year into an
account controlled by such associated person, or if the customer has
effected a transaction or made a deposit at any time into an account
controlled by such associated person and the customer's account has
earned interest or divided income during the past year. Thus, calls to
certain older or inactive accounts that fall outside these parameters
would not be covered by the exemption.
The Telemarketing Act specifically requires the SEC to establish
rules or
[[Page 39688]]
require the self-regulatory organizations to promulgate telemarketing
rules consistent with the legislation, unless the SEC determines that
the federal securities laws or SEC rules provide protection from
abusive telemarketing similar to the rules adopted by the FTC or that a
rule by the SEC is not necessary in the public interest.\12\ The NASD
believes that it is both appropriate and necessary to create an
exemption for calls to a class of customers for whom personal and
timely contact with a broker is important, particularly in the emerging
environment of 24-hour trading and trading in multiple time zones
across the United States where prompt contact with customers to respond
to market developments may be necessary. Specifically, the NASD
believes that the failure to create such an exemption would be harmful
for those securities customers for whom the need exists to be called in
a timely manner on certain occasions, and thus inconsistent with the
mandate of the Telemarketing Act. The NASD, however, also believes that
an exemption for existing customers should not extend to all customers,
and should not cover calls to those customers whose accounts do not
meet certain minimum levels of activity.
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\12\ Telemarketing Act, supra note 10.
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Demand Draft Authorization and Recordkeeping. The proposed rule
change amends Rule 3110 of the NASD's Conduct Rules 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) to require the retention of such authorization
for a period of three years. A ``demand draft'' is a methodology for
obtaining funds from a customer's bank account without that person's
signature on a negotiable instrument. The customer provide 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. Most
potential payees obtain a written authorization for the use of such a
demand draft, but the FTC found that in certain cases only oral
authorization was provided by the customer. The new language in
subparagraph (g)(2) of Rule 3110 is drawn substantially from the FTC
Rule, with the difference that the proposed rule change requires that
the customer provide written authorization of a negotiable instrument,
in comparison to the FTC Rule which would permit both written and oral
authorization subject to certain conditions.\13\ The provision in the
proposed rule for demand drafts is only intended to reflect and
implement the exact same requirement as set forth in the FTC Rule.
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\13\ Sec. 310.3 of FTC Rules.
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2. Statutory Basis
The NASD believes that the proposed rule change is consistent with
the provisions of Section 15A(b) (6) of the Act, \14\ which require
that the Association adopt and amend its rules to promote just and
equitable principles of trade and generally provide for the protection
of customers and the public interest, in that the proposed rule change,
by imposing time restriction and disclosure requirements, with certain
exceptions, on members' telemarketing calls, and by requiring
verifiable authorization from a customer for demand drafts, prevents
members from engaging in certain deceptive and abusive telemarketing
acts and practices while allowing for legitimate telemarketing
practices. The NASD also believes that the proposed rule change
fulfills the mandate that SRO rules promulgated under the Telemarketing
Act provide protection from deceptive and abusive telemarketing
practices and are necessary and appropriate in the public interest and
for the protection of investors.
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\14\ Sec. 15 U.S.C. 78o-3.
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B. Self-Regulatory Organization's Statement on Burden on Completion
The Association does not believe that the proposed rule change will
impose any inappropriate 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 either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organizations consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Comments particularly are requested
as to whether the proposed rule change satisfies the requirements of
the Telemarketing Act. Persons making written submissions should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW., 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 by 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 at the Commission's
Public Reference Room. Copies of such filing will also be available for
inspection and copying at the principal office of the NASD. All
submissions should refer to File No. SR-NASD-96-28 and should be
submitted by August 20, 1996.
For the Commission,by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19296 Filed 7-29-96; 8:45 am]
BILLING CODE 8010-01-M
