[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