NASD Interprets NASD Rule 2110 And Files Telemarketing Rule Changes With SEC

Executive Summary

As members are aware, abusive communications between members and their associated persons with customers or associated persons of other members is considered conduct that is inconsistent with the requirement that members shall observe high standards of commercial honor and just and equitable principles of trade as contained in NASD's fundamental rule of ethical practice--NASD Rule 2110 (formerly Article III, Section 1 of the NASD Rules of Fair Practice). The Federal Trade Commission (FTC) has issued regulations prescribing deceptive and abusive acts and practices in connection with telephone solicitation to market products and services (telemarketing).

Although the FTC Rules are not applicable to broker/dealers, under the Telemarketing and Consumer Fraud Prevention Act (Prevention Act), the Securities and Exchange Commission (SEC) or the self-regulatory organizations (SROs) must either have rules similar to the FTC Rules or adopt such rules. Consistent with the rules adopted by the FTC and prior NASD interpretation and policy, the NASD is advising its membership that it is inherent in and implied by the provisions of Rule 2110 that members and their associated persons shall not engage in communications with customers that constitute threats, intimidation, the use of profane or obscene language, or calling a person repeatedly on the telephone to annoy, abuse, or harass the called party.

Members and their associated persons that engage in such abusive activity shall be subject to disciplinary action by the NASD. Moreover, the NASD has filed with the SEC on June 28, 1996, proposed amendments to its rules that would implement certain parts of the regulations adopted by the Federal Communications Commission (FCC) and FTC. The rule amendments will not be effective until approved by the SEC.

Questions regarding this Notice may be directed to Suzanne E. Rothwell, at (202) 728-8247, or Robert J. Smith, at (202) 728-8176.