Compliance with securities regulations is only the beginning

By Mark J. Astarita, Esq.


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:

  1. 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.
  2. 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.
  3. 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.
  4. Established procedures – Firms must have a written policy concerning cold calling and the do-not-call lists.
  5. 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.


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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