(Volume 17, Number 1) JANUARY 1997
Telemarketing:
Rule G-39 Route To: Manager, Muni Department Sales Compliance Training
On December 16, 1996, the Securities and Exchange Commission (SEC or Commission)approved 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 rule and the amendments concern telemarketing requirements with respect to the municipal securities activities of brokers, dealers and municipal securities dealers. The rule and amendments became effective upon approval by the SEC.
Under the Telemarketing and Consumer Fraud and Abuse Prevention Act (Telemarketing Act), which became law in August 1994,[2] the Federal Trade Commission adopted detailed regulations (FTC rules)[3] to prohibit deceptive and abusive telemarketing acts and practices that became effective on December 31, 1995.[4] 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."[5]
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 fair and orderly markets, or that existing federal securities laws or SEC rules already provide for such protection.
The Board 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 rule G-17, the Board's fair dealing rule.[6] The Board believes that rule G-39 and the associated amendments address all other relevant elements of the FTC rules not covered by existing federal securities laws and regulations.
Time Limitations and Disclosure Rule G-39, on telemarketing, prohibits, under paragraph (a), a broker, dealer or municipal securities dealer or a person associated with a broker, dealer or municipal securities dealer from making 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 persons's location, without the prior consent of that person. Paragraph (b) requires such broker, dealer or municipal securities dealer or a person associated with a broker, dealer or municipal securities dealer 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 rule G-39 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, dealer or municipal securities dealer, or a clearing broker or dealer on behalf of such broker, dealer or municipal securities dealer, carries an account. Subparagraph (c)(i) 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 such associated person at the time of the transaction or deposit. Subparagraph (c)(ii) 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 permits calls by other associated persons acting at the direction of an associated person who is assigned to or controlling the account. Subparagraph (c)(iii) exempts telephone calls to a broker, dealer or municipal securities dealer. Rule G-39 expressly clarifies that the scope of the rule is limited to the telemarketing calls described herein; the terms of the rule do not otherwise expressly or by implication impose on brokers, dealers or municipal securities dealers any additional requirements with respect to the relationship between a dealer and a customer or between a person associated with a dealer and a customer.
Do Not Call List 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.
Demand Draft Authorization and Recordkeeping The amendments revise rule G-8, on books and records, to prohibit a broker, dealer or municipal securities dealer or person associated with a broker, dealer or municipal securities dealer 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)[7] without that person's express written authorization, which may include the customer's signature on the instrument. The amendments to rule G-9, on preservation of records, requires the retention of such authorization for a period of three years. The amendments also state that this provision shall not, however, require maintenance of copies of negotiable instruments signed by customers.
Telemarketing Scripts The amendments revise rule G-21, on advertising, to include "electronic" messages sent via computer and "telemarketing scripts" within the definition of "advertisement." 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. The associated record retention requirement for "advertisements" contained in the amendment to rule G-9(b)(xiii) requires brokers, dealers and municipal securities dealers to retain advertisements for three years from the date of each use.
*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. The scope of this rule is limited to the telemarketing calls described herein; the terms of this rule shall not otherwise expressly or by implication impose on brokers, dealers or municipal securities dealers any additional requirements with respect to the relationship between a dealer and a customer or between a person associated with a dealer and a customer.*
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); however, this provision shall not require maintenance of copies of negotiable instruments signed by customers; and (xiii) each advertisement from the date of each use.* (c) - (g) No change.
December 16, 1996
[1] Securities and Exchange Act Release No. 34-38053 (December 16, 1996).
[2] 15 U.S.C. Sections 6101-08.
[3] 16 C.F.R. 310.
[4] Sections 310.3-4 of FTC rules.
[5] 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.
[6] The Board implemented the requirement in (ii) referenced above by issuing an interpretation that abusive telemarketing calls are inconsistent with just and equitable principles of trade. See MSRB Reports, Vol. 16, No. 3 (September 1996) at 27.
[7] 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 providied by the customer. The new language in rule G-8(a)(xix) is drawn substantially from the FTC rule, with the difference that the 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.
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