[Federal Register Volume 62, Number 98 (Wednesday, May 21, 1997)]
[Notices]
[Pages 27823-27826]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13279]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38638; File No. SR-NYSE-97-07]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the New York 
Stock Exchange, Inc. Relating to Amendments to Rule 440A (``Telephone 
Solicitation-Recordkeeping'') and an Interpretation to Rule 472 
(``Communications with the Public'')

May 14, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ Notice is hereby given that on March 18, 1997, the New 
York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I and II below, which Items have been 
prepared by the self-regulatory organization. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
form interested persons and to grant accelerated approval of the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange has filed an amendment to Rule 440A (``Telephone 
Solicitation-Recordkeeping'') 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''),\2\ together with an interpretation of Rule 
472 (``Communications with the Public'')

[[Page 27824]]

requiring telemarketing scripts to be retained for three years.
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    \2\ 15 U.S.C. 6101-08.
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    The text of the proposed rule change is available at the Office of 
the Secretary, NYSE, 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 IV 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

1. Purpose
    Pursuant to the Telephone Consumer Protection Act (``TCPA''),\3\ 
the NYSE adopted in June 1995 a ``cold call'' rule \4\ that paralleled 
one of the rules of the Federal Communications Commission (``FCC 
Rules'') \5\ 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'').
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    \3\ 47 U.S.C. 227.
    \4\ Under the ``cold call'' rule, each NYSE 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. 35821 (June 7, 1995), 60 FR 31337 (approving File No. SR-NYSE-
95-11).
    The NASD, the MSRB, the CBOE, the Amex, and the PSE also adopted 
similar rules. See Securities Exchange Act Release Nos. 35831 (June 
9, 1995), 60 FR 31527 (approving File No. SR-NASD-96-28); 38053 
(Dec. 16, 1996), 61 FR 68078 (Dec. 26, 1996) (approving File No. SR-
MSRB-96-06; 36588 (Dec. 13, 1995), 60 FR 56624 (approving File No. 
SR-CBOE-95-63); 36748 (Jan. 19, 1996), 61 FR 2556 (approving File 
No. SR-AMEX-96-01); and 37897 (Oct. 30, 1996), 61 FR 57937 
(approving File No. SR-PSE-96-32).
    \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. (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 maybe 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'')
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    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 tele-
marketer 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.''\9\
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    \6\ Telemarketing, supra note 2.
    \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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    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 amend NYSE Rule 440A and 
the NYSE interpretation to Rule 472 in response to the Commission's 
request that major self-regulatory organizations (``SROs'') promulgate 
rules substantially similar to applicable provisions of the Federal 
Trade Commission rules adopted pursuant to the Telemarketing Act.
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    \10\ In response, the NASD and MSRB 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) and 38053 (Dec. 16, 1996) 61 FR 
68078 (Dec. 26, 996) (order approving File No. SR-MSRB-96-06).
    The Commission has determined that the NASD Rule and MSRB 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, 1996), 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 amends Rule 440A to prohibit, under 
proposed paragraph (a) To Rule 440A, a member, allied member, or 
employee of a member or member 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 (b) to Rule 
440A, such member, allied member or employee of a member or member 
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 (c) to Rule 440A creates exemptions from the 
time-of-day and disclosure requirements of paragraphs (a) and (b) for 
telephone calls by any persons associated with a member or member 
organization, or other associated persons 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.'' Paragraph (c) defines 
``existing customer'' as a customer for whom the broker or dealer, or 
clearing broker or dealer on behalf of the broker or dealer, carries an 
account. Proposed subparagraph (c)(1) exempts calls, by an associated 
person, to an existing customer who, within the preceding twelve 
months, has effected a securities

[[Page 27825]]

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 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 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.

Demand Draft Authorization and Recordkeeping

    Proposed paragraph (e) prohibits members or persons 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 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 the definition of ``sales 
literature'' contained in the interpretation to Rule 472 to include 
``telemarketing scripts'' within that definition. This will require 
telemarketing scripts to be retained for a period of three years.
2. Statutory Basis
    The basis under the Act for the proposed rule change is the 
requirement under Section 6(b)(5) that an Exchange have rules that are 
designed to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    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.\11\
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    \11\ The Commission, however, received two comment letters on an 
NASD proposal, which is substantially similar. See Letter from Brad 
N. Bernstein, Assistant Vice President & 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. Commission's Findings and Order Granting Accelerated Approval of 
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 a national securities exchange, and, in 
particular, with Section 6(b) (5) of the Act \12\ 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.\13\ The proposed rule change is consistent 
with these objectives in that it imposes time restriction and 
disclosure requirements, with certain exceptions, 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 activities.
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    \12\ 15 U.S.C. 78f(b)(5).
    \13\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    The Commission believes that the amendments to Rule 440A, 
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 amendments to Rule 440A, 
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 440A, 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

[[Page 27826]]

Rule 440A 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 440A, 
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 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 440A 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 also believes that the amendment to the NYSE 
interpretation to Rule 472 requiring the retention of telemarketing 
scripts for a period of three years is appropriate. By requiring the 
retention of telemarketing scripts for three years, the interpretation 
to Rule 472 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 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' interest in conducting legitimate telemarketing practices.
    The Commission finds good cause for approving the proposed rule 
change 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 NYSE's 
rule and interpretation 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.

IV. 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. 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-NYSE-97-07 and 
should be submitted by June 11, 1997.

V. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    It is therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-NYSE-97-07) is approved.

    \14\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13279 Filed 5-20-97; 8:45 am]
BILLING CODE 8010-01-M