[Federal Register Volume 61, Number 249 (Thursday, December 26, 1996)]
[Notices]
[Pages 68078-68081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32721]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38053; File No. SR-MSRB-96-06]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval to Proposed Rule Change and Notice of 
Filing of, and Order Granting Accelerated Approval to, Amendment No. 1 
to the Proposed Rule Change Relating to MSRB Telemarketing Rules

December 16, 1996.

I. Introduction

    On July 30, 1996, the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') 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 MSRB telemarketing rules 
\3\ the proposed rule change was published for comment in the Federal 
Register on September 7, 1996.\4\ No comments were received on the 
proposal.\5\
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On Nov. 4, 1996, the MSRB filed Amendment No. 1 to its 
proposal. Letter from Ronald W. Smith, Legal Associate, Municipal 
Securities Rulemaking Board (``MSRB''), to George A. Villasana, 
Attorney, Division of Market Regulation, SEC, dated Nov. 1, 1996.
    \4\ See Securities Exchange Act Release No. 37626 (Aug. 30, 
1996), 61 FR 47224 (Sept. 6, 1996) (notice of File No. SR-MSRB-96-
06).
    \5\ 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. Katx, Secretary, SEC, dated Aug. 21, 1996 (``ICI 
better'').
     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). In response to these letters, the MSRB 
filed Amendment No. 1 to its proposal. See Amendment No. 1, supra 
note 3.
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II. Background

    Under the Telemarketing and Consumer Fraud and Abuse Prevention Act 
(``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 
that 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 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 instruments 
called ``demand drafts.'' \9\
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    \6\ 15 U.S.C. Secs. 6101-08.
    \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 
promugage 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 MSRB 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.\10\ The MSRB believes that the proposed 
rule change addresses all

[[Page 68079]]

other relevant elements of the FTC Rules not covered by existing 
federal securities laws and regulations.
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    \10\ The Board implemented the requirement in (ii) referenced 
above by issuing an interpretation that abusive telemarketing calls 
are inconsistent with past and equitable principles of trade. See 
MSRB Reports, Vol. 16, No. 3 (Sept. 1996).
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III. Description of the Proposals

Time Limitations and Disclosure

    The proposed rule change adds rule G-39 to prohibit, under proposed 
paragraph (a) to rule G-39, 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 retailed 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, and to require, under proposed paragraph 
(b) to rule G-39, 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 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 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 dealers, carries an 
account. Proposed 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. Proposed 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 divided 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 
subparagraph (c)(iii) exempts telephone calls to a broker, dealer or 
municipal securities 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 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.\11\
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    \11\ See Amendment No. 1, Supra note 3.
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Do Not Call List

    The proposed rule change amends rule G-8, on books and records, so 
that each broker, dealer and municipal securities dealer that 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 a broker, 
dealer or municipal securities dealer or a person associated with a 
broker, dealer or municipal securities dealer.\12\
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    \12\ The NYSE, the NASD, the CBOE, the Amex, and the PSE also 
adopted similar rules. See Securities Exchange Act Release Nos. 
35821 (June 7, 1995), 60 FR 31337 (approving File No. SR-NYSE-95-
11); 35831 (June 9, 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).
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Demand Draft Authorization and Recordkeeping

    The proposed rule change also amends rule G-8, on books and 
records, to prohibit a broker, dealer or municipal securities 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'') without that person's express written 
authorization, which may include the customer's signature on the 
instrument. The proposed change to rule G-9, on preservation of 
records, requires 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.\13\
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    \13\ See Amendment No. 1, supra note 3.
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Telemarketing Scripts

    The proposed rule change amends rule G-21 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. Therefore, the associated record retention requirement for 
`'advertisements'' contained in the proposed change to rule G-
9(b)(xiii), on record retention, will require dealers to retain 
telemarketing scripts for three years.

IV Discussion

    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 Board, and, in particular, with Section 
15B(b)(c)(C) of the Act \14\ which requires, among other things, that 
the rules of the Board 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.\15\ 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, 
requires the maintenance of a do-not-call list, requires the retention 
for three years of all substantially different telemarketing scripts, 
and prevents members from engaging in certain deceptive and abusive 
telemarketing acts and practices while allowing for legitimate 
telemarketing practices. The Commission believes that the addition of 
rule G-39, prohibiting a broker, dealer or 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 
person's location, without the prior consent of the person, is 
appropriate.

[[Page 68080]]

The Commission notes that, by restricting the times during which a 
broker, dealer or municipal securities dealer or person associated with 
a broker, dealer or municipal securities dealer may call a residence, 
the Rules furthers the interest of the public and provides for the 
protection of investors by preventing brokers, dealers and municipal 
securities dealers from engaging in unacceptable practices, such as 
persistently calling members of the public at unreasonable hours of the 
day and night.
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    \14\ 15 U.S.C. Sec. 78o-4.
    \15\ 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 also believes that the addition of rule G-39, 
requiring a broker, dealer or municipal securities dealer or 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, 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, 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 
municipal 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 municipal securities.
    The Commission also believes that rule G-39, 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, dealer or municipal securities dealer 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, dealer or municipal securities dealer has a 
minimally active relationship. In this regard, the Commission believes 
that rule G-39 achieves an appropriate balance between providing 
protection for the public and the municipal brokers' and dealers' 
interest in competing for customers.
    The Commission also believes that the amendment to rule G-8, 
requiring that a broker, dealer or municipal securities dealer or 
person associated with a broker, dealer or municipal securities dealer 
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 broker, dealer and municipal securities dealer or person associated 
with a broker, dealer or municipal securities dealer 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 broker, dealer or 
municipal securities dealer or person associated with a broker, dealer 
or municipal securities dealer to misappropriate customers' funds. 
Moreover, the Commission believes that by requiring brokers, dealers 
and municipal securities dealers or persons associated with a broker, 
dealer or municipal securities dealer to retain the authorization for 
three years, rule G-8 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 municipal 
security.
    The Commission also believes that the amendment to rule G-8, 
requiring that each broker, dealer and municipal securities dealer 
maintain a centralized do-not-call list of persons who do not wish to 
receive telephone solicitations from the broker, dealer or municipal 
securities dealer or its associated persons, is appropriate. By 
requiring brokers, dealers and municipal securities dealers to maintain 
a do-not-call list, rule G-8 assists in the prevention of fraudulent 
and manipulative acts and practices, such as persistently calling 
investors who have expressed a desire not to receive telephone 
solicitations.
    The Commission also believes that the amendments to rules G-9 and 
G-21, requiring every broker, dealer and municipal securities dealer to 
retain for three years from the date of each use each advertisement 
published or designed for distribution to the public, including, among 
other things, electronic media and telemarketing scripts, is 
appropriate. By requiring brokers, dealers and municipal securities 
dealers to retain advertisements for three years, rules G-9 and G-21 
assist in the prevention of fraudulent and manipulative acts and 
practices and provide for the protection of the public in that they 
provide interested parties with the ability to acquire copies of the 
advertisements used to solicit the purchase of municipal securities to 
ensure that brokers, dealers and municipal securities dealers 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 Amendment No. 1 prior 
to the thirtieth day after the date of publication of notice thereof in 
the Federal Register. Amendment No. 1 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. 1 is appropriate and consistent with Section 15B and 
Section 19(b)(2) of the Act.
    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth, N.W., Washington, DC 
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 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 
MSRB. all submissions should refer to File No. SR-MSRB-96-06 and should 
be submitted by January 15, 1997.

[[Page 68081]]

V. Conclusion

    It is Therefore ordered, pursuant to Section 19(b)(2) of the Act, 
\16\ that the proposed rule change (SR-MSRB-96-06), as amended, is 
approved.

    \16\ 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.\17\
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    \17\ 17 CFR 200.30-3(a)(12)(1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-32721 Filed 12-24-96; 8:45 am]
BILLING CODE 8010-01-M