[Federal Register Volume 60, Number 132 (Tuesday, July 11, 1995)]
[Notices]
[Pages 35726-35728]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16909]



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COMMODITY FUTURES TRADING COMMISSION

The National Futures Association's Proposed Requirements for the 
Supervision of Telemarketing Activities

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed registered futures association rule changes.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') has 
determined pursuant to Section 17(j) of the Commodity Exchange Act 
(``Act'') to review the National Futures Association's (``NFA's'') 
proposed amendment to its Interpretive Notice to Compliance Rule 2-9. 
The proposal would revise NFA requirements regarding the supervisory 
procedures which certain NFA members must use with respect to their 
telemarketing activities. The Commission has determined that 
publication of NFA's proposal is in the public interest, will assist 
the Commission in considering the views of interested persons and is 
consistent with the purposes of the Act.

DATES: Comments must be received by August 10, 1995.

ADDRESSES: Interested persons should submit their views and comments to 
Jean A. Webb, Secretary, Commodity Futures Trading Commission, 2033 K 
Street NW., Washington, DC 20581. Telephone: (202) 254-6314.

FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Special Counsel, 
Division of Trading and Markets, Commodity Futures Trading Commission, 
2033 K Street NW., Washington, DC 20581. Telephone: (202) 254-8955.

SUPPLEMENTARY INFORMATION:

I. Introduction

    By letter dated March 15, 1995, and received March 20, 1995, the 
NFA submitted to the Commission for its approval, pursuant to Section 
17(j) of the Act, a proposed amendment to its Interpretive Notice to 
Compliance Rule 2-9. NFA's submission indicates that NFA intends to 
make the proposed amendment effective upon notice of Commission 
approval.

II. Description of NFA's Proposal

    NFA Compliance Rule 2-9 requires each NFA member 1 to 
supervise diligently its employees and agents in all aspects of their 
futures activities. NFA Compliance Rule 2-9 generally was designed to, 
among other things, prevent abusive sales practices. On January 19, 
1993, the Commission approved an amendment and Interpretive Notice to 
NFA Compliance Rule 2-9 which required NFA member firms which met 
prescribed criteria to adopt specific supervisory procedures designed 
to prevent abusive telemarketing sales practices.2

    \1\ NFA Compliance Rule 1-1 defines the term ``member'' to mean 
all Commission registrants except floor brokers and floor traders.
    \2\ NFA's telemarketing supervision requirements responded to a 
1992 amendment of Section 17(p)(4) to the Act which required NFA to 
establish special supervisory guidelines for telephone solicitation 
of new futures and options accounts and to make the guidelines 
applicable to those members determined to require such procedures in 
accordance with standards established by the Commission consistent 
with the Act. Sec. 204 of the Futures Trading Practices Act of 1992 
(``FTPA''), Pub. L. No. 102-546, 106 Stat. 3590 (1992) (codified at 
Section 17(p) of the Act, 7 U.S.C. Sec. 21(p)). 

[[Page 35727]]

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    Under the current Interpretive Notice, an NFA member firm is 
required to adopt enhanced supervisory procedures over its 
telemarketing activities if the member: (1) Has at least five but less 
than ten associated persons (``APs'') and 50% or more of those APs have 
been employed by one or more member firms which have been disciplined 
by the NFA or the Commission for sales practice fraud; (2) has a least 
ten but less than 20 APs and five or more of those APs have been 
employed by one or more member firms which have been disciplined by the 
NFA or the Commission for sales practice fraud; or (3) has 20 or more 
APs and 25% or more of those APs have been employed by one or more 
members which have been disciplined by the NFA or the Commission for 
sales practice fraud.3

    \3\ For these purposes, the Interpretive Notice to Compliance 
Rule 2-9 defines ``disciplined member firm'' as a firm which: (1) 
has been formally charged by either the Commission or the NFA with 
deceptive telemarketing practices; (2) has had those charges 
resolved; and (3) has been closed down and permanently barred from 
the futures industry as a result of those charges.
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    Currently, an NFA member firm which meets the above-described 
criteria is required to tape-record all of its APs' sales solicitations 
which occur prior to the receipt of a customer's initial deposit and 
until the first order is received and entered for the customer's 
account. Firms meeting the criteria must tape-record such solicitations 
for a one-year period and retain the tapes up until six months after 
the one-year recording period ends.4

    \4\ NFA can grant waivers from these requirements upon a 
satisfactory showing that a member firm's supervisory procedures 
provide effective supervision over its employees.
    Based upon its experience overseeing the current telemarketing 
supervision requirements, NFA believes that the requirements have 
reduced the occurrence of widespread telemarketing fraud and have 
facilitated the gathering of evidence in enforcement actions related to 
deceptive telemarketing sales practices.
    NFA's subject proposal would revise three different aspects of its 
current telemarketing supervision requirements. NFA contends that its 
proposed adjustments should increase the effectiveness of these 
requirements.
    First, NFA's proposal would lower the thresholds at which NFA 
member firms would be required to adopt enhanced telemarketing 
supervision measures. Under the proposal, a firm would have to 
implement the enhanced procedures if it: (1) had at least five but less 
than ten APs and 40% or more of the APs had been previously employed by 
a disciplined firm (the current threshold is 50%); (2) had at least ten 
but less than 20 APs and four or more of the APs had been previously 
employed by a disciplined firm (the current threshold is five or more 
APs); and, (3) had 20 or more APs and 20% or more of the APs had 
previously been employed by a disciplined firm (the current threshold 
is 25% or more).5 The NFA contends that lowering the threshold at 
which member firms must implement telemarketing supervision measures 
should offer increased protection from fraudulent telemarketing 
practices.

    \5\ Under NFA's proposal, member firms with fewer than five APs 
would continue to be exempt from any enhanced telemarketing 
supervision requirements.
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    Second, NFA's proposal would revise the telemarketing supervision 
measures for those member firms which met the amended thresholds. 
Specifically, the proposal would require that such firms tape record 
all telephone conversations which occurred between their APs and any 
potential or existing customers. Currently, NFA does not have any 
taping requirement after a customer's first order is received and 
entered into the customer's account. NFA has found, however, that in 
many cases sales practice violations occur after the customer already 
has begun trading. In order to address this problem, NFA's proposal 
would expand the taping requirement to all AP-customer conversations.
    Third, NFA's proposal would require that firms which were subject 
to the telemarketing supervision measures must submit their promotional 
material 6 to the NFA for approval at least ten days before the 
marketing material was used.7 In support of this measure NFA 
contends that it has found that member firms which have lax supervisory 
requirements relating to telemarketing often have similar lax 
requirements with respect to the review and use of promotional 
material.

    \6\ NFA Compliance Rule 2-29(g) defines ``promotional material'' 
to include:
    (1) Any text of a standardized oral presentation, or any 
communication for publication in any newspaper, magazine or similar 
medium, or for broadcast over television, radio, or other electronic 
medium, which is disseminated or directed to the public concerning a 
futures account, agreement or transaction; (2) any standardized form 
of report, letter, circular, memorandum, or publication which is 
disseminated or directed to the public for the purpose of soliciting 
a futures account, agreement or transaction * * *
    \7\ It should be noted that NFA already has a ``pre-review'' 
program whereby members may voluntarily submit promotional material 
to NFA staff for review prior to its first use. NFA staff reviews 
material for consistency with the requirements of Compliance Rule 2-
29 and provides its comments to submitting members. Given that NFA 
staff is not able to review material for factual accuracy, a member 
who submits promotional material to NFA under the pre-review program 
does not receive any safe harbor protection with respect to those 
materials.
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    The Commission also notes that on August 16, 1994, the President 
signed into law the Telemarketing and Consumer Fraud and Abuse 
Prevention Act (``Telemarketing Act''), Public Law No. 103-297, which 
requires that the Federal Trade Commission (``FTC'') adopt rules 
prohibiting various deceptive and abusive telemarketing practices 
within one year of the enactment of the Telemarketing Act. The 
Telemarketing Act also added a new Section 6(f) to the Commodity 
Exchange Act 8 requiring, subject to certain exceptions, that the 
Commission ``promulgate, or require each registered futures association 
to promulgate, rules substantially similar'' to the FTC rules 
implementing the Telemarketing Act within six months of the effective 
date of those rules, unless the Commission determines otherwise.9

    \8\ Sec. 6(f) of the Act and Sec. 3(e) of the Telemarketing Act.
    \9\ Section 6(f)(2) of the Act provides that the Commission is 
not required to promulgate rules if it determines that:
    (1) its rules provide protection from deceptive and abusive 
telemarketing by persons subject to its jurisdiction substantially 
similar to that provided by the FTC's rules under the Telemarketing 
Act; or,
    (2) such a rule promulgated by the Commission is not necessary 
or appropriate in the public interest, or for the protection of 
customers in the futures and options markets, or would be 
inconsistent with the maintenance of fair and orderly markets.
    If the Commission determines that either of these exceptions 
applies, it must publish the reasons for its determination in the 
Federal Register.
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    On February 14, 1995, the FTC published its proposed telemarketing 
rules.10 The proposed rules generally prohibit certain deceptive 
and abusive telemarketing activities as well as establishing various 
requirements with respect to the time and frequency of telephone 
solicitations. The FTC published a revised notice of its proposed rules 
on June 8, 1995.11

    \10\ 60 FR 8313.
    \11\ 60 FR 30406. The FTC's proposed rules generally were 
revised to address various concerns raised by commenters regarding 
the original proposed rules.
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    Currently, the Commission is reviewing the FTC's proposed rules. 
The Commission will continue to monitor the FTC's efforts to promulgate 
telemarketing rules in order to determine whether the Commission's and 
the NFA's rules provide substantially similar protections.

III. Request for Comments

    The Commission requests general comment on NFA's proposed amendment 
to its Interpretive Notice to Compliance Rule 2-9. The Commission 

[[Page 35728]]
also requests specific comment on two particular aspects of NFA's 
proposal. First, comment is requested concerning whether the NFA's 
proposed revisions to the Interpretive Notice's ``triggering 
thresholds'' are appropriate. Second, comment is requested concerning 
whether the NFA has adequate measures to ensure compliance with the 
taping requirements of the current and proposed Interpretive Notice. In 
addition, the Commission also requests specific comment on NFA's 
proposal in the context of the Telemarketing Act and the FTC's 
implementing rules.
    Copies of NFA's proposed Interpretive Notice amendment will be 
available for inspection at the Office of the Secretariat, Commodity 
Futures Trading Commission, 2033 K Street NW., Washington, D.C. 20581, 
except to the extent that the proposal may be entitled to confidential 
treatment as set forth in 17 CFR 145.5 and 145.9 (1994). Copies also 
may be obtained through the Office of the Secretariat at the above 
address or by telephoning (202) 254-6314.
    Any person interested in submitting written data, views or 
arguments on NFA's proposed amendment to its Interpretive Notice to 
Compliance Rule 2-9 or with respect to other materials submitted by the 
NFA in support of the proposal should send such comments to Jean A. 
Webb, Secretary, Commodity Futures Trading Commission, 2033 K Street, 
N.W., Washington, D.C. 20581, by the specified date.

    Issued in Washington, D.C. on July 5, 1995.
Alan L. Seifert,
Deputy Director, Division of Trading and Markets.
[FR Doc. 95-16909 Filed 7-10-95; 8:45 am]
BILLING CODE 6351-01-P