[Federal Register Volume 62, Number 149 (Monday, August 4, 1997)]
[Notices]
[Pages 41983-41986]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20411]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38875; File No. SR-Phlx-97-18]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 Thereto by the Philadelphia Stock Exchange, Inc. Relating to 
Telemarketing Practices by Members and Member Organizations

July 25, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 30, 1997, the Philadelphia Stock Exchange, Inc. (``Phlx'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the self-
regulatory organization. On July 21, 1997, the Phlx submitted Amendment 
No. 1 to the proposed rule change.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons and to grant accelerated approval of the proposed rule change, 
as amended.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Michele R. Weisbaum, Vice President and 
Associate General Counsel, Phlx, to Deborah Flynn, Attorney, 
Division of Market Regulation, SEC, dated July 14, 1997 (``Amendment 
No. 1''). In Amendment No. 1, the Phlx replaced all references to 
``participant'' and ``participant organization'' in the proposal 
with ``foreign currency option participant'' and ``foreign currency 
option participant organization'' to clarify the applicability of 
the proposed rule.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add Rule 762, Telemarketing, 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'').\4\
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    \4\ 15 U.S.C. Secs. 6101-08.
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    The proposal also amends Rule 605, Advertising, Market Letters, 
Research Reports and Sales Literature, requiring telemarketing scripts 
to be retained for three years and to make the rule specifically 
applicable to foreign currency option participants and foreign currency 
option participants organizations as well as to members and member 
organizations.\5\
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    \5\ According to the Exchange, it will issue an Information 
Circular advising the membership of the new telemarketing rules upon 
their approval, and clarifying that abusive, annoying or harassing 
telemarketing calls by members, foreign currency option 
participants, member organizations and foreign currency option 
participant organizations or their associated persons are violative 
of Phlx Rules 707 and 762.
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    The text of the proposed rule change and Amendment No. 1 is 
available at the Office of the Secretary, Phlx, 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 III 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

Purpose
    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 
telemarketer to identify himself or herself, the company he or she 
works for, and the purposes 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\ See Telemarketing Act, supra note 4.
    \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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[[Page 41984]]

    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 add Phlx Rule 762 and to 
amend Phlx Rule 605 in response to the Commission's request that self-
regulatory organizations (``SROs'') promulgate rules substantially 
similar to applicable provisions of the FTC rules adopted pursuant to 
the Telemarketing Act
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    \10\ In response, the National Association of Securities Dealers 
(``NASD''), the Municipal Securities Rulemaking Board (``MSRB''), 
the New York Stock Exchange (``NYSE'') and the American Stock 
Exchange (``Amex'') 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); 38053 (Dec. 16, 1996), 61 FR 68078 (Dec. 26, 1996) 
(order approving File No. SR-MSRB-96-06); 38638 (May 14, 1997), 62 
FR 27823 (May 21, 1997) (order approving File No. SR-NYSE-97-07); 
and 38724 (June 6, 1997), 62 FR 32390 (June 13, 1997) (order 
approving File No. SR-Amex-97-17).
    The Commission has determined that the NASD Rule, the MSRB Rule, 
the NYSE Rule and the Amex 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, 1997), 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 adds Rule 
762 to prohibit, under proposed paragraph (a)(1) to Rule 762, a member, 
foreign currency option participant, or person associated with a member 
or foreign currency option participant 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 (a)(2) to 
Rule 762, such member, foreign currency option participant or person 
associated with a member or foreign currency option participant 
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 (a)(3) to Rule 762 creates exemptions from the 
time-of-day and disclosure requirements of paragraphs (a)(1) and (a)(2) 
for telephone calls by any persons associated with a member or foreign 
currency option participant organization or other associated person 
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.'' Proposed paragraph (a) also defines ``existing customer'' 
as a customer for whom the member or foreign currency option 
participant organization, or clearing broker or dealer on behalf of the 
member or foreign currency option participant organization, carries an 
account. Proposed subparagraph (a)(3)(i) exempts 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 (a)(3)(ii) exempt 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 subparagraph (a)(3)(iii) 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 or foreign currency options participants 
any additional requirements with respect to the relationship between a 
member or foreign currency option participant and a customer or between 
a person associated with a member or foreign currency option 
participant organization and a customer.
    Do-Not-Call List: Proposed paragraph (b) to Rule 762 requires each 
member or foreign currency option participant organization that engages 
in telephone solicitation to market its products and services to make 
and maintain a centralized do-not-call list of persons who do not wish 
to receive telephone solicitations from a member or foreign currency 
option participant organization or its associated persons.
    Demand Draft Authorization and Recordkeeping: Proposed paragraph 
(c) to Rule 762 prohibits members and foreign currency option 
participants or persons associated with a member or a foreign currency 
option participant organization 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 Phix 
Rule 605 and its accompanying commentary and supplementary material to 
include ``telemarketing scripts'' within its rules governing the 
issuance of advertisements, market letters, research reports and sales 
literature. Therefore, telemarketing scripts will be required to be 
retained for a period of three years. The Exchange also proposes to 
amend parts .02, .08 and .10 to the Exchange's Supplementary 
Information Regarding Rule 605, relating to Disclosure, Claims for 
Research and Identification of Sources, to clarify the applicability of 
these guidelines to foreign currency option participants and foreign 
currency option participant organizations.
2. Statutory Basis
    The Exchange believes that the basis under the Act for the proposed 
rule change is the requirement under Section 6(b)(5) \11\ that an 
Exchange have rules that are designed to promote just and equitable 
principles of trade, to remove impediments to, and perfect the

[[Page 41985]]

mechanism of a free and open market and, in general, to protect 
investors and the public interest.
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    \11\ 15 U.S.C. Sec. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that 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.\12\
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    \12\ The Commission, however, received two comment letters on an 
NASD proposal (SR-NASD-96-28), which is substantially similar. See 
Letter from Brad N. Bernstein, Assistant Vice President and 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. 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. Sec. 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-Phlx-97-18 and 
should be submitted by August 25, 1997.

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

    The Commission finds that the proposed rule change, as amended, 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\13\ 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.\14\ The proposed rule change, as 
amended, is consistent with these objectives in that it imposes time 
restriction and disclosure requirements, with certain exceptions, and 
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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    \13\ 15 U.S.C. Sec. 78f(b)(5).
    \14\ In approving this rule, the Commission has considered the 
proposed rule's 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 762, prohibiting 
a member or foreign currency option participant or person associated 
with a member or foreign currency option participant organization 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 foreign currency option participant or person 
associated with a member or foreign currency option participant 
organization may call a residence, the proposal furthers the interest 
of the public and provides for the protection of investors by 
preventing members and foreign currency option participant 
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 762, 
requiring a member or foreign currency option participant or person 
associated with a member or foreign currency option participant 
organization 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, Rule 762 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 further believes that Rule 762, which creates 
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 762 achieves an appropriate balance 
between providing protection for the public and the members' and 
foreign currency option participants' interests in competing for 
customers.
    The Commission believes that Rule 762, requiring that each member 
or foreign currency option participant organization maintain a 
centralized do-not-call list of persons who do not wish to receive 
telephone solicitations from such member, foreign currency option 
participant organization or associated persons, is appropriate. By 
requiring members and foreign currency option participant organizations 
to maintain a do-not-call list, Rule 762 assists in the prevention of 
fraudulent and manipulative acts and practices, such as persistently 
calling investors who have expressed a desire to not receive telephone 
solicitations.
    Moreover, the Commission believes that the provisions of Rule 762, 
requiring that a member, foreign currency option participant or person 
associated with a member or foreign currency option participant 
organization obtain from a customer, and maintain for three years, 
express written authorization when submitting for

[[Page 41986]]

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, foreign currency option 
participant or person associated with a member or foreign currency 
option participant organization 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, foreign currency option participant or person 
associated with a member or foreign currency option participant 
organization to misappropriate customers' funds. In addition, the 
Commission believes that by requiring a member, foreign currency option 
participant or person associated with a member or foreign currency 
option participant organization to retain the authorization for three 
years, Rule 762 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 believes that the amendment to Rule 605, requiring 
the retention of telemarketing scripts for a period of three years is 
appropriate. By requiring the retention of telemarketing scripts for 
three years, Rule 605 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, foreign currency option participant organizations 
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' and foreign currency option participant 
organizations' interests in conducting legitimate telemarketing 
practices.
    The Commission notes that the Exchange proposes to amend parts .02, 
.08 and .10 to its Supplementary Information Regarding Rule 605, 
relating to Disclosure, Claims for Research and Identification of 
Sources, to clarify the applicability of these guidelines to foreign 
currency option participants and foreign currency option participant 
organizations. The Commission believes that the Exchange's proposal to 
clarify that its guidelines apply to foreign currency option 
participants and foreign currency option participant organizations is 
reasonable.
    The Commission finds good cause for approving the proposed rule 
change, including Amendment No. 1, 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 Phlx's rules 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.\15\
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    \15\ 15 U.S.C. Sec. 78f.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-Phlx-97-18), including 
Amendment No. 1, is approved on an accelerated basis.

    \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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-20411 Filed 8-1-97; 8:45 am]
BILLING CODE 8010-01-M