August 2002

Compliance Clarified:  Do-Not-Call Lists

Broker/Dealers who cold call to drum up new retail business must comply with several self-regulatory organization and state regulations, and states' do-not-call lists.  Many state regulations may include B/Ds while on the surface appearing to target only the generic telemarketer.  Meanwhile, more and more states have steadily been joining the ranks of those with such laws, with at least six states so far in 2002 alone enacting their own versions of such laws.  Illinois and Massachusetts are the most recent to have joined the list of other states with telemarketing laws.

NASD Rules

The NASD adopted two rules in response to the Telemarketing and Consumer Fraud and Abuse Prevention Act of 1995 that led to the creation of the Telemarketing Sales Rule by the Federal Trade Commission.  The rule does not apply to the securities industry, and rulemaking for the industry was left to the Securities and Exchange Commission and the SROs, which in turn created NASD Rules 2211 and 3110.

Rule 2211 restricts calls "for the purpose of soliciting the purchase of securities or related services" to "between 8 a.m. and 9 p.m. local time at the called person's location."  The rule also requires prompt and clear disclosure of "the identity of the caller and the member 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."

Joseph Sanscrainte, director of regulatory affairs and general counsel at vendor Call Compliance in New York, which helps firms comply with do-not-call and telemarketing restriction laws, said that in addition to self-identification, the rule also exempts from its provisions calls to persons who are defined as existing customers.  An existing customer is defined as someone who has made a securities transaction within the past year.  Calls to other firms are also exempt, said Sanscrainte.  He added that Rule 3110 requires firms to maintain internal, centralized do-not-call lists, to which the names of persons requesting not to be called by the firm must be added, for example.

State Rules

Sanscrainte said there are about 27 states that have their own do-not-call list laws with only a few specifically exempting B/Ds - Alabama, Arkansas, and Kentucky.  Texas also exempts B/Ds, said David Weaver, general counsel at the Texas State Securities Board.  Although the board does not administer the state's do-not-call law, Weaver said the law specifically excludes calls to sell securities from its restrictions.  Sanscrainte cautioned that firms should examine the remaining 23 state laws carefully to see if they apply to B/Ds because their definitions of a telemarketer or telemarketing, for example, may or may not turn out to include B/Ds.  While many states explain do-not-call laws on state-run Web sites, it is still advisable to check with your local regulator and to read the law itself, added Sanscrainte.

Of the 25 states that do not have do-no-call lists, many have had legislation introduced to create such lists, said Sanscrainte.  One house of New Jersey's legislature passed do-not-call legislation.  According to a press release referred to by a spokeswoman who declined to comment, the state's assembly approved a bill to enact a do-not-call list bill on June 20.  A letter from the bill's sponsor's urge the state senate to hold hearing and pass the bill once the legislature reconvenes in September.

Beth Bosch, spokeswoman for the Illinois Commerce Commission, said the state's new law does not make any exception for B/Ds, as it does for non-profits, charities and insurance companies, for example.  But, it does make an exception for businesses with existing relationships with customers, or prior consent of those they are calling, which can include B/Ds, said Bosch.

The number of states over the past two years that have enacted do-not-call legislation has exploded, said William Heberer, senior associate at Hall, Dickler, Kent, Goldstein & Wood, who represents telemarketers.  Two years ago, there were about eight to 10 states with such laws, and now that number has doubled.  Most recently five to six states this year alone have enacted such laws, including Massachusetts, said Heberer.  Other states this year include Indiana, Illinois, Kansas, Pennsylvania, and Minnesota, he added.  Kansas enacted a law in June, while Pennsylvania and Minnesota enacted laws earlier in the spring.

The Federal Trade Commission earlier this year proposed to create a national do-not-call list, although it is not clear, said Sanscrainte, how that would effect B/Ds.  He said that presumably, under existing law, the SEC and the SROs would have to incorporate any changes the FTC makes in the Telemarketing Sales Rule.