Introduction
Cold calling is a method of marketing a service or product by calling
prospective clients "cold" - that is, without an introduction, to determine
if the potential client has a need for, or interest in, the caller's
product. Cold calling has a long history in the brokerage community,
and while having a poor reputation, is a legitimate and valuable marketing
tool for brokerage firms, and provides a legitimate source of information
for customers, provided the tool is not abused.
However, there have been abuses, inside and outside the brokerage
industry, of the cold calling procedure. Most of the complaints regarding
the procedure have arise outside the industry, and relate to the time
of day that the calls are made, the use of automated dialers and similar
technological "advances" in the telecommunications industry, as well
as outright fraud. While these complaints have focused on non-brokerage
industry firms and practices, the regulations regarding same affect
the brokerage industry.
The Basic Regulations and Rules
In accordance with the
Telephone Consumer Protection Act of 1991, the Federal Communications
Commission (FCC) issued
a cold-calling rule. The rule establishes procedures to eliminate unwanted
telephone solicitations to residences and regulates the use of automatic
telephone dialing systems, pre-recorded or artificial voice messages,
and telephone facsimile machines. In particular, any firm that solicits
customers or sales by means of cold calls must abide by the following:
- Time-of-day restrictions - No cold calls may be made before 8
a.m. or after 9 p.m. at the called party's location.
- Do-not-call lists - Firms must establish and maintain a do-not-call
list. If called parties request that no further cold calls be made
to them, their names must be added to the do-not-call list.
- Identification requirements - Persons making cold calls must
provide the called party with the name of the caller, the person
or organization on whose behalf the call is being made, and a telephone
number and address at which the caller may be contacted.
- Established procedures - Firms must have a written policy concerning
cold calling and the do-not-call lists.
- Training requirements - All personnel must be trained concerning
cold-calling rules and the existence and use of do-not-call lists.
The FCC rule excludes calls made to parties with whom the caller has
an established business relationship and calls for which the calling
party has received prior express invitation or permission.
In addition, several states now have statutes which specifically
address cold calling, and brokers should check with their compliance
departments for the rules in all states where cold calls are going
to be made, as well as for the rep's home state.
The SEC recently approved a New York Stock Exchange proposed rule,
Rule 440A, which requires a broker-dealer who engages in cold calling
to maintain written records of customers who do not want to be contacted
in the future. The list is referred to as a "do-not-call list". The
NASD Rules of Fair Practice have a similar requirement.
The Exchange rule, which is enacted under the Exchange's authority
to protect the public and to promote the public interest, is derived
from the Exchange's authority under Section 6(b)(5) of the Securities
Exchange Act.
The Exchange has also released an Interpretation Memo, Number 95-6
which states "each member and member organization shall make and maintain
a centralized list of persons who have informed the member, member
organization or any employee thereof that they do not which to receive
telephone solications."
Penalties for Violations
Given the overlapping nature of the regulations, there are four different
actions that can be taken against brokers or brokerage firms which violate
the cold calling rules. First, the FCC can institute proceedings in
federal court, or administratively, for violating its rule, with potential
fines of up to $500 per day for each offense. [1].
The Attorney General of any state where a violation occurs is also
authorized to bring an action for a permanent injunction in federal
district court, if the Attorney General believes that the firm is
engaged in a pattern of conduct which violates the FCC rules, and
in addition to the injunction, can obtain actual damages, or a fine
of $500 for each violation, with the potential for fines of $1,500
per violation, if intentional. [2].
The statute also authorizes individuals who have received more than
one call per year from a telemarketer violating the rule can also
initiate a state court action, for actual losses, an injunction, and
a $500 fine per violation. [3].
Despite the possibility of actions by the FCC and an AG, of more
immediate concern to securities professionals is the possibility of
administrative actions by the NYSE or the NASD for violations of their
respective cold calling rules, with the typical available remedies
of fine, suspension, or bar. [4].
Preventing Violations
Firms, and individual brokers, can avoid possible violations of the
cold calling rules, by insuring that all employees who make cold calls
are familiar with the provisions of the rule, including the time restrictions.
With many cold callers working late at night, a violation of the 9PM
restriction, particularily for callers on the West Coast, can easily
occur if the firm is not careful. Further, firms should be sure that
a do not call list is in place, and that the firm has procedures, either
computerized or manually, for callers themselves to update the firm's
do not call list, and that the updated list is available to all potential
callers and brokers.
Procedures, and monitoring of those procedures, are an important
part of a firms compliance responsibility. However, since the FCC
cold calling rule provides for a defense, in a private action, that
the broker "established and implimented with due care, reasonable
procedures" to prevent violations, those procedures may provide the
defense needed should the firm find itself being sued by a potential
customer, and may provide a basis for a defense in an SRO proceeding
as well.
Endnotes
1. Sec. 502. Violation of rules, regulations, etc.
Any person who willfully and knowingly violates any rule, regulation,
restriction, or condition made or imposed by the Commission under
authority of this chapter, or any rule, regulation, restriction, or
condition made or imposed by any international radio or wire communications
treaty or convention, or regulations annexed thereto, to which the
United States is or may hereafter become a party, shall, in addition
to any other penalties provided by law, be punished, upon conviction
thereof, by a fine of not more than $500 for each and every day during
which such offense occurs. Return to text
2. 47
USC Sec. 227(f) provides authorization for these actions. Return
to text
3. 47
USC Sec.227(c)(5). Return to text
4. See NASD Rules of Fair Practice, Article
V, Sec.1, and NYSE Rule 476. Return to text
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