[Federal Register Volume 62, Number 149 (Monday, August 4, 1997)]
[Notices]
[Pages 41983-41986]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20411]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38875; File No. SR-Phlx-97-18]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change and Amendment No.
1 Thereto by the Philadelphia Stock Exchange, Inc. Relating to
Telemarketing Practices by Members and Member Organizations
July 25, 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 June 30, 1997, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the self-
regulatory organization. On July 21, 1997, the Phlx submitted Amendment
No. 1 to the proposed rule change.\3\ 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. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Michele R. Weisbaum, Vice President and
Associate General Counsel, Phlx, to Deborah Flynn, Attorney,
Division of Market Regulation, SEC, dated July 14, 1997 (``Amendment
No. 1''). In Amendment No. 1, the Phlx replaced all references to
``participant'' and ``participant organization'' in the proposal
with ``foreign currency option participant'' and ``foreign currency
option participant organization'' to clarify the applicability of
the proposed rule.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to add Rule 762, Telemarketing, which is
substantially similar to applicable provisions of the Federal Trade
Commission rules adopted pursuant to the Telemarketing and Consumer
Fraud and Abuse Prevention Act (``Telemarketing Act'').\4\
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\4\ 15 U.S.C. Secs. 6101-08.
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The proposal also amends Rule 605, Advertising, Market Letters,
Research Reports and Sales Literature, requiring telemarketing scripts
to be retained for three years and to make the rule specifically
applicable to foreign currency option participants and foreign currency
option participants organizations as well as to members and member
organizations.\5\
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\5\ According to the Exchange, it will issue an Information
Circular advising the membership of the new telemarketing rules upon
their approval, and clarifying that abusive, annoying or harassing
telemarketing calls by members, foreign currency option
participants, member organizations and foreign currency option
participant organizations or their associated persons are violative
of Phlx Rules 707 and 762.
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The text of the proposed rule change and Amendment No. 1 is
available at the Office of the Secretary, Phlx, and at the Commission.
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
Purpose
Under the 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; the regulations 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 purposes of the call, and (v) require express
written authorization or other verifiable authorization from the
customer before the firm may use negotiable instruments called ``demand
drafts.'' \9\
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\6\ See Telemarketing Act, supra note 4.
\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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[[Page 41984]]
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 purpose of the proposed rule change is to add Phlx Rule 762 and to
amend Phlx Rule 605 in response to the Commission's request that self-
regulatory organizations (``SROs'') promulgate rules substantially
similar to applicable provisions of the FTC rules adopted pursuant to
the Telemarketing Act
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\10\ In response, the National Association of Securities Dealers
(``NASD''), the Municipal Securities Rulemaking Board (``MSRB''),
the New York Stock Exchange (``NYSE'') and the American Stock
Exchange (``Amex'') 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);
and 38724 (June 6, 1997), 62 FR 32390 (June 13, 1997) (order
approving File No. SR-Amex-97-17).
The Commission has determined that the NASD Rule, the MSRB Rule,
the NYSE Rule and the Amex Rule, together with the Exchange 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, 1997), 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 remaining SROs to
file similar proposals.
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Time Limitations and Disclosure: The proposed rule change adds Rule
762 to prohibit, under proposed paragraph (a)(1) to Rule 762, a member,
foreign currency option participant, or person associated with a member
or foreign currency option participant organization 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 (a)(2) to
Rule 762, such member, foreign currency option participant or person
associated with a member or foreign currency option participant
organization 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 (a)(3) to Rule 762 creates exemptions from the
time-of-day and disclosure requirements of paragraphs (a)(1) and (a)(2)
for telephone calls by any persons associated with a member or foreign
currency option participant organization or other associated person
acting at the direction of such persons for the 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 (a) also defines ``existing customer''
as a customer for whom the member or foreign currency option
participant organization, or clearing broker or dealer on behalf of the
member or foreign currency option participant organization, carries an
account. Proposed subparagraph (a)(3)(i) exempts 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 the associated person at the time of the transaction or
deposit. Proposed subparagraph (a)(3)(ii) exempt 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 dividend 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 (a)(3)(iii) 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 or foreign currency options participants
any additional requirements with respect to the relationship between a
member or foreign currency option participant and a customer or between
a person associated with a member or foreign currency option
participant organization and a customer.
Do-Not-Call List: Proposed paragraph (b) to Rule 762 requires each
member or foreign currency option participant organization that engages
in telephone solicitation to market its products and services to make
and maintain a centralized do-not-call list of persons who do not wish
to receive telephone solicitations from a member or foreign currency
option participant organization or its associated persons.
Demand Draft Authorization and Recordkeeping: Proposed paragraph
(c) to Rule 762 prohibits members and foreign currency option
participants or persons associated with a member or a foreign currency
option participant organization 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 to require 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.
Telemarketing Scripts: The proposed rule change also amends Phix
Rule 605 and its accompanying commentary and supplementary material to
include ``telemarketing scripts'' within its rules governing the
issuance of advertisements, market letters, research reports and sales
literature. Therefore, telemarketing scripts will be required to be
retained for a period of three years. The Exchange also proposes to
amend parts .02, .08 and .10 to the Exchange's Supplementary
Information Regarding Rule 605, relating to Disclosure, Claims for
Research and Identification of Sources, to clarify the applicability of
these guidelines to foreign currency option participants and foreign
currency option participant organizations.
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) \11\ that an
Exchange have rules that are designed to promote just and equitable
principles of trade, to remove impediments to, and perfect the
[[Page 41985]]
mechanism of a free and open market and, in general, to protect
investors and the public interest.
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\11\ 15 U.S.C. Sec. 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.\12\
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\12\ The Commission, however, received two comment letters on an
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. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Room. Copies of the filing will also
be available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-Phlx-97-18 and
should be submitted by August 25, 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\13\ which requires,
among other things, that the rules of the exchange 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.\14\ The proposed rule change, as
amended, is consistent with these objectives in that it imposes time
restriction and disclosure requirements, with certain exceptions, and
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
allowing for legitimate telemarketing activities.
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\13\ 15 U.S.C. Sec. 78f(b)(5).
\14\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. Sec. 78c(f).
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The Commission believes that the addition of Rule 762, prohibiting
a member or foreign currency option participant or person associated
with a member or foreign currency option participant organization 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 the prior consent of the person, is
appropriate. The Commission notes that, by restricting the times during
which a member or foreign currency option participant or person
associated with a member or foreign currency option participant
organization may call a residence, the proposal furthers the interest
of the public and provides for the protection of investors by
preventing members and foreign currency option participant
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 addition of Rule 762,
requiring a member or foreign currency option participant or person
associated with a member or foreign currency option participant
organization 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 securities or related services,
is appropriate. By requiring the caller to identify himself or herself
and the purpose of the call, Rule 762 assists in the prevention of
fraudulent and manipulative acts and practices by providing investors
with information necessary to make an informed decision when purchasing
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 securities.
The Commission further believes that Rule 762, which creates
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
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 has a minimally active relationship. In this regard,
the Commission believes that Rule 762 achieves an appropriate balance
between providing protection for the public and the members' and
foreign currency option participants' interests in competing for
customers.
The Commission believes that Rule 762, requiring that each member
or foreign currency option participant organization maintain a
centralized do-not-call list of persons who do not wish to receive
telephone solicitations from such member, foreign currency option
participant organization or associated persons, is appropriate. By
requiring members and foreign currency option participant organizations
to maintain a do-not-call list, Rule 762 assists in the prevention of
fraudulent and manipulative acts and practices, such as persistently
calling investors who have expressed a desire to not receive telephone
solicitations.
Moreover, the Commission believes that the provisions of Rule 762,
requiring that a member, foreign currency option participant or person
associated with a member or foreign currency option participant
organization obtain from a customer, and maintain for three years,
express written authorization when submitting for
[[Page 41986]]
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, foreign currency option
participant or person associated with a member or foreign currency
option participant organization 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, foreign currency option participant or person
associated with a member or foreign currency option participant
organization to misappropriate customers' funds. In addition, the
Commission believes that by requiring a member, foreign currency option
participant or person associated with a member or foreign currency
option participant organization to retain the authorization for three
years, Rule 762 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 believes that the amendment to Rule 605, requiring
the retention of telemarketing scripts for a period of three years is
appropriate. By requiring the retention of telemarketing scripts for
three years, Rule 605 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, foreign currency option participant organizations
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' and foreign currency option participant
organizations' interests in conducting legitimate telemarketing
practices.
The Commission notes that the Exchange proposes to amend parts .02,
.08 and .10 to its Supplementary Information Regarding Rule 605,
relating to Disclosure, Claims for Research and Identification of
Sources, to clarify the applicability of these guidelines to foreign
currency option participants and foreign currency option participant
organizations. The Commission believes that the Exchange's proposal to
clarify that its guidelines apply to foreign currency option
participants and foreign currency option participant organizations is
reasonable.
The Commission finds good cause for approving the proposed rule
change, including Amendment No. 1, 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 Phlx'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.\15\
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\15\ 15 U.S.C. Sec. 78f.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (SR-Phlx-97-18), including
Amendment No. 1, is approved on an accelerated basis.
\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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-20411 Filed 8-1-97; 8:45 am]
BILLING CODE 8010-01-M
