(Volume 16, Number 3) SEPTEMBER 1996
Route To: Manager,Muni Department Sales Compliance Training
Proposed Rule and Amendments Filed Proposed rule G-39 and amendments to rules G-21, G-8 and G-9 concern telemarketing requirements with respect to the municipal securities activities of brokers, dealers and municipal securities dealers.
Questions about the proposed rule and amendments may be directed to Ronald W. Smith, Legal Associate.
On July 29, 1996, the Board filed with the Securities and Exchange Commission (SEC or Commission) proposed rule G-39, on telemarketing, and amendments to rules G-21, on advertising, G-8, on books and records, and G-9, on preservation of records.[1] The proposed rule and the amendments concern telemarketing requirements with respect to the municipal securities activities of brokers, dealers and municipal securities dealers. The proposed rule and amendments will become effective upon approval by the SEC.
Under the Telemarketing and Consumer Fraud and Abuse Prevention Act (Prevention Act), which became law in August 1994, the Federal Trade Commission adopted detailed regulations (FTC rules) to prohibit deceptive and abusive telemarketing acts and practices that became effective on December 31, 1995. The FTC rules, among other things, (i) require the maintenance of "do-not-call" lists and procedures, (ii) prohibit 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, the company he works for, and the purpose of the call, and (v) require express written authorization or other verifiable authorization from the customer before use of negotiable instruments called "demand drafts."[2]
While the FCC and FTC rules are applicable to dealers 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). Under the Prevention 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 such rules are not necessary or appropriate for the protection of investors or the maintenance of orderly markets or that existing SEC rules already provide for such protection. The SEC determined that it was necessary to adopt rules to carry out the SEC's obligation under the Prevention Act to provide appropriate enforcement of the rules. In April 1996, the SEC staff requested that the Board implement requirement (ii) referenced above by issuing an interpretation that such conduct is violative of existing rules and implement requirements (i) and (iii) - (v) by amending its rules.
Rule G-17, the Board's fair dealing rule, provides that
In the conduct of its municipal securities business, each broker, dealer, and municipal securities dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice.
The Board has determined that it is inherent in and implied by rule G-17 that it is contrary to fair dealing for dealers and their associated persons to engage in communications with customers regarding transactions in municipal securities that constitute threats, intimidation, the use of profane or obscene language, or calling a person repeatedly on the telephone to annoy, abuse, or harass the called party.
Do Not Call List As noted above, the Commission is required by the Prevention Act to promulgate, or require the SROs to promulgate, rules substantially similar to the FTC rules, unless existing rules provide substantially similar protection in securities transactions, or such additional rules otherwise are not necessary or appropriate. Brokers, dealers and municipal securities dealers who engage in telephone solicitation to market their products and services are subject to the requirements of the rules of the FCC relating to telemarketing practices and the rights of telephone consumers and shall refer to FCC rules for specific restrictions on telephone solicitations. This includes, but is not limited to, the requirements to make and maintain a list of persons who do not want to receive telephone solicitations. The amendment to rule G-8, on books and records, requires that each broker, dealer and municipal securities dealer that engages in telephone solicitation to market its products and services shall make and maintain a centralized do-not-call list of persons who do not wish to receive telephone solicitations from such dealer or its associated persons.
Time Limitations and Disclosure The rule filing adds proposed rule G-39, on telemarketing, to the Board's rules. Paragraph (a) prohibits a dealer or a person associated with a dealer from making outbound telephone calls to a member of the public's residence for the purpose of soliciting the purchase of municipal securities or related services at any time other than between 8 a.m. and 9 p.m. local time at the called persons's location. Paragraph (b) requires such dealer 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 municipal securities or related services.
Paragraph (c) to proposed rule G-39 creates exemptions from the time-of-day and disclosure requirements of paragraphs (a) and (b) for telephone calls by associated persons, or another associated person acting at the direction of such associated persons, for purposes of maintaining and servicing existing customers assigned to or under the control of such associated persons, to certain categories of "existing customers." Paragraph (c) defines "existing customer" as a customer for whom the broker, dealer or municipal securities dealer, or a clearing broker or dealer on behalf of such broker, dealer or municipal securities dealer, carries an account. Proposed subparagraph (c)(i)exempts such calls 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 such associated person at the time of the transaction or deposit. Proposed subparagraph (c)(ii)exempts such calls 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 such associated person at the time of the transaction or deposit, as long as such customer's account has earned interest or dividend during the preceding twelve months. Proposed subparagraph (c)(iii) exempts telephone calls to a broker, dealer or municipal securities dealer.
Subparagraphs (c)(i) and (ii) together exclude only some calls to existing customers from the time-of-day and disclosure requirements of the proposed rule. An associated person, or another associated person acting at the direction of such associated person, may contact a customer without complying with the requirements of the rule if the customer has effected a transaction or made a deposit during the past year into an account controlled by such associated person, or if the customer has effected a transaction or made a deposit at any time into an account controlled by such associated person and the customer's account has earned interest or dividend income during the past year. Thus, calls to certain older or inactive accounts that fall outside these parameters would not be covered by the exemption.
The Prevention Act specifically requires the SEC to establish rules or require the self-regulatory organizations to promulgate telemarketing rules consistent with the legislation, unless the SEC determines that its rules provide protection from abusive telemarketing similar to the rules adopted by the FTC or that a rule by the SEC is not necessary in the public interest. The Board believes that it is both appropriate and necessary to create an exemption for calls to a class of customers for whom personal and timely contact with a dealer is important, particularly in the emerging environment of 24-hour trading and trading in multiple time zones across the United States where prompt contact with customers to respond to market developments may be necessary. Specifically, the Board believes that the failure to create such an exemption would be harmful for those securities customers for whom the need exists to be called in a timely manner on certain occasions, and thus inconsistent with the mandate of the Prevention Act. However, the Board also believes that an exemption for existing customers should not extend to all customers, and should not cover calls to those customers whose accounts do not meet certain minimum levels of activity.
Demand Draft Authorization and Recordkeeping The proposed amendments revise rule G-8, on books and records, to 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, share, or similar account (demand draft) without that person's express written authorization, which may include the customer's signature on the instrument. The proposed amendments to rule G-9, on preservation of records, requires the retention of such authorization for a period of three years. A "demand draft" is a method for obtaining 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. Most potential payees obtain a written authorization for the use of such a demand draft, but the FTC found that in certain cases only oral authorization was provided by the customer. The new language in rule G-8(a)(xix) is drawn substantially from the FTC rule, with the difference that the proposed amendments require that the customer provide written authorization of a negotiable instrument, in comparison to the FTC rule which would permit both written and oral authorization. The provision in the proposed amendments for demand drafts is only intended to reflect and implement the same requirement as set forth in the FTC rule.
Telemarketing Scripts The FTC rules contain a recordkeeping requirement that all substantially different telemarketing scripts be retained. The Board is amending its definition of "advertisement," in rule G-21, to include "telemarketing scripts" within that definition. Thus, the associated record retention requirement for advertisements contained in the proposed amendments to rule G-9(b)(xiii), on record retention, will require dealers to retain telemarketing scripts for three years.
The Board is also amending the definition of "advertisement" to include "electronic" messages sent via computer. The inclusion of the term "electronic" within the definition of "advertisement" is intended to apply to communication available to all network subscribers including items displayed over network bulletin boards, and it is intended to apply to messages sent directly to individuals or targeted groups.
July 29, 1996
*Rule G-39. Telemarketing* *No broker, dealer or municipal securities dealer or person associated with a broker, dealer or municipal securities dealer shall:* *(a) make outbound telephone calls to the residence of any person for the purpose of soliciting the purchase of municipal 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; or* *(b) make an outbound telephone call to any person for the purpose of soliciting the purchase of municipal securities or related services without disclosing promptly and in a clear and conspicuous manner to the called person the following information:* *(I) the identity of the caller and the firm; (ii) the telephone number or address at which the caller may be contacted; and (iii) that the purpose of the call is to solicit the purchase of municipal securities or related services.* *(c) The prohibitions of paragraphs (a) and (b) shall not apply to telephone calls by any person associated with a broker, dealer, or municipal securities dealer, or another associated person acting at the direction of such person for the purpose of maintaining and servicing the accounts of existing customers of the broker, dealer or municipal securities dealer under the control of or assigned to such associated person:* *(I) 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 that, at the time of the transaction or the deposit, was under the control of or assigned to, such associated person;* *(ii) to an existing customer who previously has effected a securities transaction in, or made a deposit of funds or securities into, an account that, at the time of the transaction or deposit, was under the control of or assigned to, such associated person, provided that such customer's account has earned interest or dividend income during the preceding twelve months, or* *(iii) to a broker, dealer or municipal securities dealer. For the purposes of paragraph (c), the term "existing customer" means a customer for whom the broker, dealer or municipal securities dealer, or a clearing broker or dealer on behalf of such broker, dealer or municipal securities dealer, carries an account.*
Rule G-21. Advertising (a) Definition of "Advertisement." For purposes of this rule, the term "advertisement" means any material (other than listings of offerings) published or designed for use in the public *, including electronic,* media, or any promotional literature designed for dissemination to the public, including any notice, circular, report, market letter, form letter *, telemarketing script* or reprint or excerpt of the forgoing. The term does not apply to preliminary official statements or official statements, but does apply to abstracts or summaries of official statements, offering circulars and other such similar documents prepared by {municipal securities} brokers *, dealers* or municipal securities dealers. (b) - (e) No change.
Rule G-8. Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers (a) Description of Books and Records Required to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer: (I) - (xviii) No change. *(xix) Telemarketing Requirements.* *(A) Each broker, dealer and municipal securities dealer shall make and maintain a centralized do-not-call list of persons who do not wish to receive telephone solicitations from such broker, dealer or municipal securities dealer or its associated persons.* *(B) No broker, dealer or municipal securities dealer or person associated with such broker, dealer or municipal securities dealer shall obtain from a customer or submit for payment a check, draft or other form of negotiable paper drawn on a customer's checking, savings, share, or similar account, without that person's express written authorization, which may include the customer's signature on the negotiable instrument.* (b) - (e) No change. (f) Compliance with Rule 17a-3. Brokers, dealers and municipal securities dealers other than bank dealers which are in compliance with rule 17a-3 of the Commission will be deemed to be in compliance with the requirements of this rule, provided that the information required by subparagraph (a)(iv)(D) of this rule as it relates to uncompleted transactions involving customers; paragraph (a)(viii); paragraph (a)(xi); paragraph (a)(xii); paragraph (a)(xiii); paragraph (a)(xiv); paragraph (a)(xv); paragraph (a)(xvi);{and} paragraph (a)(xviii)*; and paragraph (a)(xix)* shall in any event be maintained.
Rule G-9. Preservation of Records (a) No change. (b) Records to be Preserved for Three Years. Every {municipal securities} broker *, dealer* and municipal securities dealer shall preserve the following records for a period of not less than three years: (I) - (ix) No change. (x) all records of deliveries of rule G-32 disclosures required to be retained as described in rule G-8(a)(xiii); {and} (xi) the records to be maintained pursuant to rule G-8(a)(xv)*; (xii)the authorization required by rule G-8(a)(xix)(B);and (xiii) each advertisement from the date of each use.* (c) - (g) No change.
[1] File No. SR-MSRB-96-6. Comments sent to the Commission should refer to the file number.
[2] Pursuant to the Telephone Consumer Protection Act, the Federal Communications Commission (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 includes, at a minimum, (a) a written policy for maintaining the do-not-call list, (b) training personnel in the existence and the 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. With certain limited exceptions, the FCC rules apply to all residential telephone solicitations, including those relating to securities transactions. The term "telephone solicitation" refers to the initiation of a telephone call or message for the purpose of encouraging the purchase or rental of, or investment in, property, goods, or services, which is transmitted to any person, other than with the called person's express invitation or permission, or to a person with whom the caller has an established business relationship, or by tax-exempt non-profit organization.
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