The National Futures Association's Proposed Requirements for the Supervision of Telemarketing Activities

COMMODITY FUTURES TRADING COMMISSION

The National Futures Association's Proposed Requirements for the

Supervision of Telemarketing Activities

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed registered futures association rule changes.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') has

determined pursuant to Section 17(j) of the Commodity Exchange Act

(``Act'') to review the National Futures Association's (``NFA's'')

proposed amendment to its Interpretive Notice to Compliance Rule 2-9.

The proposal would revise NFA requirements regarding the supervisory

procedures which certain NFA members must use with respect to their

telemarketing activities. The Commission has determined that

publication of NFA's proposal is in the public interest, will assist

the Commission in considering the views of interested persons and is

consistent with the purposes of the Act.

DATES: Comments must be received by August 10, 1995.

ADDRESSES: Interested persons should submit their views and comments to

Jean A. Webb, Secretary, Commodity Futures Trading Commission, 2033 K

Street NW., Washington, DC 20581. Telephone: (202) 254-6314.

FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Special Counsel,

Division of Trading and Markets, Commodity Futures Trading Commission,

2033 K Street NW., Washington, DC 20581. Telephone: (202) 254-8955.

SUPPLEMENTARY INFORMATION:

I. Introduction

By letter dated March 15, 1995, and received March 20, 1995, the

NFA submitted to the Commission for its approval, pursuant to Section

17(j) of the Act, a proposed amendment to its Interpretive Notice to

Compliance Rule 2-9. NFA's submission indicates that NFA intends to

make the proposed amendment effective upon notice of Commission

approval.

II. Description of NFA's Proposal

NFA Compliance Rule 2-9 requires each NFA member 1 to

supervise diligently its employees and agents in all aspects of their

futures activities. NFA Compliance Rule 2-9 generally was designed to,

among other things, prevent abusive sales practices. On January 19,

1993, the Commission approved an amendment and Interpretive Notice to

NFA Compliance Rule 2-9 which required NFA member firms which met

prescribed criteria to adopt specific supervisory procedures designed

to prevent abusive telemarketing sales practices.2

\1\ NFA Compliance Rule 1-1 defines the term ``member'' to mean

all Commission registrants except floor brokers and floor traders.

\2\ NFA's telemarketing supervision requirements responded to a

1992 amendment of Section 17(p)(4) to the Act which required NFA to

establish special supervisory guidelines for telephone solicitation

of new futures and options accounts and to make the guidelines

applicable to those members determined to require such procedures in

accordance with standards established by the Commission consistent

with the Act. Sec. 204 of the Futures Trading Practices Act of 1992

(``FTPA''), Pub. L. No. 102-546, 106 Stat. 3590 (1992) (codified at

Section 17(p) of the Act, 7 U.S.C. Sec. 21(p)).

[[Page 35727]]

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Under the current Interpretive Notice, an NFA member firm is

required to adopt enhanced supervisory procedures over its

telemarketing activities if the member: (1) Has at least five but less

than ten associated persons (``APs'') and 50% or more of those APs have

been employed by one or more member firms which have been disciplined

by the NFA or the Commission for sales practice fraud; (2) has a least

ten but less than 20 APs and five or more of those APs have been

employed by one or more member firms which have been disciplined by the

NFA or the Commission for sales practice fraud; or (3) has 20 or more

APs and 25% or more of those APs have been employed by one or more

members which have been disciplined by the NFA or the Commission for

sales practice fraud.3

\3\ For these purposes, the Interpretive Notice to Compliance

Rule 2-9 defines ``disciplined member firm'' as a firm which: (1)

has been formally charged by either the Commission or the NFA with

deceptive telemarketing practices; (2) has had those charges

resolved; and (3) has been closed down and permanently barred from

the futures industry as a result of those charges.

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Currently, an NFA member firm which meets the above-described

criteria is required to tape-record all of its APs' sales solicitations

which occur prior to the receipt of a customer's initial deposit and

until the first order is received and entered for the customer's

account. Firms meeting the criteria must tape-record such solicitations

for a one-year period and retain the tapes up until six months after

the one-year recording period ends.4

\4\ NFA can grant waivers from these requirements upon a

satisfactory showing that a member firm's supervisory procedures

provide effective supervision over its employees.

Based upon its experience overseeing the current telemarketing

supervision requirements, NFA believes that the requirements have

reduced the occurrence of widespread telemarketing fraud and have

facilitated the gathering of evidence in enforcement actions related to

deceptive telemarketing sales practices.

NFA's subject proposal would revise three different aspects of its

current telemarketing supervision requirements. NFA contends that its

proposed adjustments should increase the effectiveness of these

requirements.

First, NFA's proposal would lower the thresholds at which NFA

member firms would be required to adopt enhanced telemarketing

supervision measures. Under the proposal, a firm would have to

implement the enhanced procedures if it: (1) had at least five but less

than ten APs and 40% or more of the APs had been previously employed by

a disciplined firm (the current threshold is 50%); (2) had at least ten

but less than 20 APs and four or more of the APs had been previously

employed by a disciplined firm (the current threshold is five or more

APs); and, (3) had 20 or more APs and 20% or more of the APs had

previously been employed by a disciplined firm (the current threshold

is 25% or more).5 The NFA contends that lowering the threshold at

which member firms must implement telemarketing supervision measures

should offer increased protection from fraudulent telemarketing

practices.

\5\ Under NFA's proposal, member firms with fewer than five APs

would continue to be exempt from any enhanced telemarketing

supervision requirements.

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Second, NFA's proposal would revise the telemarketing supervision

measures for those member firms which met the amended thresholds.

Specifically, the proposal would require that such firms tape record

all telephone conversations which occurred between their APs and any

potential or existing customers. Currently, NFA does not have any

taping requirement after a customer's first order is received and

entered into the customer's account. NFA has found, however, that in

many cases sales practice violations occur after the customer already

has begun trading. In order to address this problem, NFA's proposal

would expand the taping requirement to all AP-customer conversations.

Third, NFA's proposal would require that firms which were subject

to the telemarketing supervision measures must submit their promotional

material 6 to the NFA for approval at least ten days before the

marketing material was used.7 In support of this measure NFA

contends that it has found that member firms which have lax supervisory

requirements relating to telemarketing often have similar lax

requirements with respect to the review and use of promotional

material.

\6\ NFA Compliance Rule 2-29(g) defines ``promotional material''

to include:

(1) Any text of a standardized oral presentation, or any

communication for publication in any newspaper, magazine or similar

medium, or for broadcast over television, radio, or other electronic

medium, which is disseminated or directed to the public concerning a

futures account, agreement or transaction; (2) any standardized form

of report, letter, circular, memorandum, or publication which is

disseminated or directed to the public for the purpose of soliciting

a futures account, agreement or transaction * * *

\7\ It should be noted that NFA already has a ``pre-review''

program whereby members may voluntarily submit promotional material

to NFA staff for review prior to its first use. NFA staff reviews

material for consistency with the requirements of Compliance Rule 2-

29 and provides its comments to submitting members. Given that NFA

staff is not able to review material for factual accuracy, a member

who submits promotional material to NFA under the pre-review program

does not receive any safe harbor protection with respect to those

materials.

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The Commission also notes that on August 16, 1994, the President

signed into law the Telemarketing and Consumer Fraud and Abuse

Prevention Act (``Telemarketing Act''), Public Law No. 103-297, which

requires that the Federal Trade Commission (``FTC'') adopt rules

prohibiting various deceptive and abusive telemarketing practices

within one year of the enactment of the Telemarketing Act. The

Telemarketing Act also added a new Section 6(f) to the Commodity

Exchange Act 8 requiring, subject to certain exceptions, that the

Commission ``promulgate, or require each registered futures association

to promulgate, rules substantially similar'' to the FTC rules

implementing the Telemarketing Act within six months of the effective

date of those rules, unless the Commission determines otherwise.9

\8\ Sec. 6(f) of the Act and Sec. 3(e) of the Telemarketing Act.

\9\ Section 6(f)(2) of the Act provides that the Commission is

not required to promulgate rules if it determines that:

(1) its rules provide protection from deceptive and abusive

telemarketing by persons subject to its jurisdiction substantially

similar to that provided by the FTC's rules under the Telemarketing

Act; or,

(2) such a rule promulgated by the Commission is not necessary

or appropriate in the public interest, or for the protection of

customers in the futures and options markets, or would be

inconsistent with the maintenance of fair and orderly markets.

If the Commission determines that either of these exceptions

applies, it must publish the reasons for its determination in the

Federal Register.

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On February 14, 1995, the FTC published its proposed telemarketing

rules.10 The proposed rules generally prohibit certain deceptive

and abusive telemarketing activities as well as establishing various

requirements with respect to the time and frequency of telephone

solicitations. The FTC published a revised notice of its proposed rules

on June 8, 1995.11

\10\ 60 FR 8313.

\11\ 60 FR 30406. The FTC's proposed rules generally were

revised to address various concerns raised by commenters regarding

the original proposed rules.

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Currently, the Commission is reviewing the FTC's proposed rules.

The Commission will continue to monitor the FTC's efforts to promulgate

telemarketing rules in order to determine whether the Commission's and

the NFA's rules provide substantially similar protections.

III. Request for Comments

The Commission requests general comment on NFA's proposed amendment

to its Interpretive Notice to Compliance Rule 2-9. The Commission

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also requests specific comment on two particular aspects of NFA's

proposal. First, comment is requested concerning whether the NFA's

proposed revisions to the Interpretive Notice's ``triggering

thresholds'' are appropriate. Second, comment is requested concerning

whether the NFA has adequate measures to ensure compliance with the

taping requirements of the current and proposed Interpretive Notice. In

addition, the Commission also requests specific comment on NFA's

proposal in the context of the Telemarketing Act and the FTC's

implementing rules.

Copies of NFA's proposed Interpretive Notice amendment will be

available for inspection at the Office of the Secretariat, Commodity

Futures Trading Commission, 2033 K Street NW., Washington, D.C. 20581,

except to the extent that the proposal may be entitled to confidential

treatment as set forth in 17 CFR 145.5 and 145.9 (1994). Copies also

may be obtained through the Office of the Secretariat at the above

address or by telephoning (202) 254-6314.

Any person interested in submitting written data, views or

arguments on NFA's proposed amendment to its Interpretive Notice to

Compliance Rule 2-9 or with respect to other materials submitted by the

NFA in support of the proposal should send such comments to Jean A.

Webb, Secretary, Commodity Futures Trading Commission, 2033 K Street,

N.W., Washington, D.C. 20581, by the specified date.

Issued in Washington, D.C. on July 5, 1995.

Alan L. Seifert,

Deputy Director, Division of Trading and Markets.

[FR Doc. 95-16909 Filed 7-10-95; 8:45 am]

BILLING CODE 6351-01-P