[Federal Register Volume 61, Number 241 (Friday, December 13, 1996)]
[Notices]
[Pages 65625-65628]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-31723]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38009; File No. SR-NASD-96-28]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Order Granting Approval to Proposed Rule Change and
Notice of Filing of, and Order Granting Accelerated Approval to,
Amendment No. 3 to the Proposed Rule Change Relating to NASD
Telemarketing Rules
December 2, 1996.
I. Introduction
On June 28, 1996, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') 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 NASD telemarketing
rules.\3\ The proposed rule change was published for comment in the
Federal Register on July 30, 1996.\4\ The Commission received two
comment letters regarding the proposal.\5\
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\1\ 15 U.S.C. (Sec. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
\3\ On July 18, 1996, the NASD filed Amendment No. 1 to its
proposal. 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.
On July 24, 1996, the NASD filed Amendment No. 2 to its proposal.
Letter from John Ramsay, Deputy General Counsel, NASDR, to Katherine
A. England, Assistant Director, Division of Market Regulation, SEC,
dated July 24, 1996. On October 21, 1996, the NASD filed Amendment
No. 3 to its proposal. Letter from John Ramsay, Deputy General
Counsel, NASDR, to Katherine A. England, Assistant Director,
Division of Market Regulation, SEC, dated October 18, 1996.
\4\ See Securities Exchange Act Release No. 37475 (July 24,
1996), 61 FR 39686 (July 30, 1996) (notice of File No. SR-NASD-96-
28).
\5\ See Letter from Brad N. Bernstein, Assistant Vice President
& Senior Attorney, Merrill Lynch, to Jonathan G. Katz, Secretary,
SEC, dated August 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'').
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II. Background
Pursuant to the Telephone Consumer Protection Act (``TCPA''),\6\
the NASD adopted in June 1995, a ``cold call'' rule \7\ that paralleled
one of the rules of the Federal Communications Commission (``FCC
Rule'') \8\ and requires persons who 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 caller (``do-not-call list'').\9\
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\6\ 47 U.S.C. Sec. 227.
\7\ Under the ``cold call'' rule, each NASD member who 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 such
member or its associated persons. Securities Exchange Act Release
No. 35831 (Jun. 9, 1995), 60 FR 31527 (Jun. 15, 1995) (order
approving File No. SR-NASD-95-13).
\8\ 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. (local 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 included, 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 CFR 64.1200). With certain limited exceptions, the
FCC Rules apply to all residential telephone solicitations,
including those relating to securities transactions. Id. While the
FCC Rules are applicable to brokers that engage in telephone
solicitation to market their products and services, those
regulations cannot be enforced by either the SEC or the securities
self-regulatory organizations (``SROs'').
\9\ Release No. 35831, supra note 7.
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Under the Telemarketing and Consumer Fraud and Abuse Prevention Act
(``Telemarketing Act''), which became law in August 1994,\10\ the
Federal Trade Commission adopted detailed regulations (``FTC Rules'')
\11\ to prohibit deceptive and abusive telemarketing acts and practices
that became effective on December 31, 1995.\12\ 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 negotiable
instruments called ``demand drafts.''\13\
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\10\ 15 U.S.C. Secs. 6101-08.
\11\ 16 CFR 310.
\12\ Secs. 310.3-4 of FTC Rules.
\13\ 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
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. The
NASD believes that, because the SROs will be the primary enforcers of
these rules, it may be more appropriate for the SROs individually to
adopt separate rules than for the SEC to adopt 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 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.\14\
The NASD believes that the proposed rule change addresses all other
relevant elements of the FTC Rules not covered by existing federal
securities laws and regulations.
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\14\ The NASDR issued 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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III. Description of the Proposals
Time Limitations and Disclosure
The proposed rule change adds Rule 2211 to 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
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
[[Page 65626]]
prior consent of the person, 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
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 (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 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 or dealer, or a
clearing broker or dealer on behalf of the broker or dealer, carriers
an account. Proposed subparagraph (c)(1) 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 the associated person at the time of the transaction or
deposit. Proposed subparagraph (c)(2) 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 dividend income during
the preceding twelve months. Each of these exemptions also permit calls
by other associated persons acting at the direction of an associated
person who is assigned to or controlling the account. Proposed
paragraph (c)(3) 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 any additional requirements with respect to the relationship
between a member and a customer or between a person associated with a
member and a customer.\15\
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\15\ See Amendment No. 3, supra note 3.
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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. The proposal also states
that this provision shall not, however, require maintenance of copies
of negotiable instruments signed by customers.\16\
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\16\ Id.
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IV. Summary of Comments
The Commission received two negative comment letters regarding the
NASD's initial proposal to amend NASD telemarketing rules.\17\ The
issues raised therein, together with responses by the NASD, including
amendments to its initial proposed rule change, are discussed below.
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\17\ See supra note 5.
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In the Merrill Lynch Letter, Merrill Lynch objected to paragraph
(c) of Rule 2211, which exempts from the time-of-day and disclosure
requirements of paragraphs (a) and (b) telephone calls by associated
persons 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.''
Merrill Lynch stated that the language of paragraph (c) implies that
the relationship between the associated person controlling or assigned
to the specific customer account is the defining relationship for
purposes of the Rule rather than the relationship between the firm and
the customer. Merrill Lynch further stated that the language appears to
disregard the common practice of a firm designating an associated
person in place of one earlier assigned to an account but who may no
longer be assigned to it or may no longer be associated with the firm.
Accordingly, Merrill Lynch suggested deletion of the phrase ``under the
control of or assigned to such associated person'' in paragraph (c) of
Rule 2211 and replacing the words ``an account that, at the time of the
transaction or the deposit, was under the control of or assigned to,
such associated person'' in subparagraphs (c) (1) and (2) of Rule 2211
with the phrase ``an account maintained at the member.'' Merrill Lynch
also objected to the definition of ``existing customer'' provided in
subparagraph (c)(3) of Rule 2211, which defines the term as ``a
customer for whom the broker or dealer, or clearing broker or dealer on
behalf of such broker or dealer, carries an account.'' Merrill Lynch
stated that the language fails to recognize those customers that may
use or engage services of the firm, but not maintain an account with
the firm. Accordingly, Merrill Lynch suggested modifying the definition
of ``existing customer'' to mean ``a person who currently maintains an
account with, has positions or assets on the books of, or who within
the past twelve months has used services provided by the firm, an
affiliated firm, or a clearing broker or dealer acting, on its
behalf.''
Merrill Lynch also objected to NASD Conduct Rule 3110, which seeks
to (i) prohibit 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 or similar account without obtaining
that person's express written authorization; and (ii) to require the
retention of such authorization for a three year period. Merrill Lynch
stated that this creates an unintended consequence with respect to
original checks in that it requires the maintenance of customer checks
for three years. This is because actual checks pass out of the
receiving firms' possession and return ultimately to the makers' banks,
and thus physically could not be retained. Accordingly, Merrill Lynch
suggested adding to subparagraph (g)(3) the following language: ``This
provision shall not, however, require maintenance of copies of
negotiable instruments signed by customers.''
In response to the Merrill Lynch Letter, the NASDR amended Rule
2211 by adding the following to subparagraph (c)(3): ``The scope of
this Rule shall not otherwise expressly or by implication impose on
members any additional requirements with respect to the relationship
between a member and a customer or between a person associated with a
member and a customer.'' The NASDR believes that this clarifies that
the proposed rule is not intended to affect the definition of
``customer'' or the nature of firm-customer or salesperson-customer
relationships, outside the context of the rule. The NASDR also amended
Rule 3110 by adding the following to subparagraph (g)(3): ``This
provision shall not, however, require maintenance of copies of
negotiable instruments signed by customers.''
In the ICI Letter, the ICI raised the concern that Rule 3110 may
apply to and, therefore, prohibit certain
[[Page 65627]]
telephonic or electronic mutual fund transactions initiated by existing
mutual fund shareholders. For example, the ICI argued that telephone
exchange transactions could be deemed to violate Rule 3110 because they
entail oral instructions to redeem shares of one fund and purchase
shares of another fund. Moreover, ICI argues that unless the broker-
dealer's customer provided written authorization to debit the
customer's bank account to his or her broker-dealer, who in turn
forwarded such written authorization to the fund's distributor, the
distributor could be deemed to be in violation of Rule 3110. In
response to the ICI Letter, the NASDR stated that electronic or
telephonic mutual fund transfers initiated by existing mutual fund
shareholders do not involve telemarketing and, therefore, Rule 3110
does not apply to such transactions.
V. Discussion
After careful consideration of the comments and the NASDR's
responses thereto, the Commission has determined to approve the
proposed rule change. 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 Association, and, in
particular, with Section 15A(b)(6) of the Act\18\ which requires, among
other things, that the rules of the Association 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.\19\ The proposed rule change is consistent
with these objectives in that it imposes time restriction and
disclosure requirements, with certain exceptios, on 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 practices.
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\18\ 15 U.S.C. Sec. 780-3.
\19\ 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 believes that the addition of Rule 2211, prohibiting
a member or person associated with a member 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 person associated with a member may call a residence, the proposal
furthers the interest of the public and provides for the protection of
investors by preventing members and member 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 2211,
requiring a member or person associated with a member 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, 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 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 also believes that Rule 2211, 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 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 2211 achieves an appropriate balance between providing
protection for the public and the members' interest in competing for
customers.
The Commission also believes that the amendment to Rule 3110,
requiring that a member or person associated with a member 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
member or person associated with a member 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 or person associated with a
member to misappropriate customers' funds. Moreover, the Commission
believes that by requiring a member or person associated with a member
to retain the authorization for three years, Rule 3110 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.
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. 3 prior
to the thirtieth day after the date of publication of notice thereof in
the Federal Register. Amendment No. 3 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. 3 is appropriate and consistent with Section 15A and
Section 19(b)(2) of the Act.
Interested persons are invited to submit written date, views and
arguments concerning Amendment No. 3. 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 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
[[Page 65628]]
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 NASD. All submissions should refer to File No.
SR-NASD-96-28 and should be submitted by January 6, 1997.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\20\ that the proposed rule change (SR-NASD-96-28), as amended, as
approved.
\20\ 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.\21\
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\21\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-31723 Filed 12-12-96; 8:45 am]
BILLING CODE 8010-01-M