Advisory:11-97

For Release:March 5, 1997

CFTC Receives Report From NFA Concerning Telemarketing Practices

On June 24, 1996, the Commodity Futures Trading Commission (CFTC) published a notice of determination that existing provisions of the Commodity Exchange Act (CEAct) and rules of the CFTC and National Futures Association (NFA) provide protection from abusive and deceptive telemarketing practices "substantially similar" to that provided by the Federal Trade Commission's recently promulgated telemarketing rule. 61 Fed. Reg. 32323. This determination obviated the need for further rulemaking in this area, which otherwise would have been required under Section 6(f) of the CEAct, 7 U.S.C. 9b, and the Telemarketing and Consumer Fraud and Abuse Prevention Act, 15 U.S.C. 6101 et seq.

When the CFTC made this determination, its Division of Trading and Markets sent a letter to NFA dated June 18, 1996 which stated, in part, that NFA should apprise the CFTC if NFA detects telemarketing problems in the course of its reviews of the sales practices of futures industry professionals. In addition, the Division of Trading and Markets requested that NFA report annually, beginning in January 1997, concerning any deceptive or abusive telemarketing practices discovered by NFA in the course of such sales practice reviews and any recommendations or suggestions for further rulemaking or interpretative guidance by the CFTC or NFA in this area.

NFA has submitted its first annual report in response to the Division's letter. A copy of NFA's report, dated January 22, 1997, is attached.

NFA reports, among other things, that since NFA implemented telemarketing requirements in 1993, which were approved by the CFTC on January 19, 1993, twelve NFA member firms have been required to tape record sales solicitations. Eight of these firms have been the subject of NFA disciplinary actions and, in almost every case, the tape-recorded sales solicitations constituted an important part of the proof of violation of NFA rules. NFA noted that such solicitations frequently make unsupported claims concerning the likelihood that customers will realize dramatic profits by doing business with the firm. NFA issued a Notice to Members in June 1996 to reiterate that such presentations clearly violate NFA's sales practice rules.

NFA further reported that since the implementation of telemarketing requirements in 1993, customer complaints filed at NFA have decreased by approximately one-third and the number of currently registered associated persons (APs) who have previously worked at expelled firms has been reduced by approximately one- fourth.

Over the past four years, CFTC has approved enhancements to NFA's telemarketing requirements which include:

• lowering from 25 percent to 20 percent the threshold which requires a firm to implement telemarketing requirements -- the threshold is based on the percentage of a firm's APs who have been employed by a firm disciplined by NFA or CFTC for sales practice fraud;

• expanding the taping requirements to include all conversations with both existing and potential customers, rather than only those solicitations that occur prior to a customer's initial order;

• requiring affected firms to prefile all promotional material with NFA;

• increasing the period for which affected firms must tape and retain tapes from one year to two years; and

• requiring affected firms to operate pursuant to a guarantee agreement or maintain adjusted net capital of at least $250,000.

In its report, NFA stated that, at this time, it did not have any recommendations or suggestions for further rulemaking or inter pretative guidance relating to the supervision of telemarketing activities.

The Division of Trading and Markets has also asked NFA to review the activities of APs that have been terminated by multiple firms and to prioritize the reviews of sales practices of those firms that hire a significant amount of APs from disciplined firms but that are below the threshold levels triggering the telemarketing requirements. See Division of Trading and Markets, Review of the Registration Processing Program of National Futures Association, at 12 (September 1996).

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