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Notice I-96-21

October 03, 1996

Amendments to Interpretive Notice Regarding Supervision of Telemarketing Activity

The CFTC recently approved several changes to NFA's Interpretive Notice to NFA Compliance Rule 2-9: Supervision of Telemarketing Activity. These changes were adopted by NFA's Board of Directors after careful review of NFA's first two years of experience in applying the Interpretive Notice. The Board concluded that the Interpretive Notice has worked well to ensure that Member firms whose hiring practices invite potential telemarketing problems adopt enhanced supervisory practices. The Board also concluded, however, that certain refinements to the Interpretive Notice would further that goal.

The full text of the revised Interpretive Notice is attached. The principal changes that were made are summarized below:

  • The criteria which trigger a Member's obligation to adopt enhanced supervisory requirements have changed. Now, Members who hire 20 percent, rather than 25 percent, or more of their APs from firms which have been barred from the industry for deceptive telemarketing practices will be subject to the enhanced supervisory requirements. The criteria are slightly different for firms with fewer than 20 APs. Firms with at least five and less than 10 APs will be affected by the rule if 40 percent of their APs are drawn from barred firms; firms with at least 10 and less than 20 APs will be covered if four or more of their APs previously worked for barred firms.

  • Firms covered by the Interpretive Notice must tape record all conversations between APs and existing or prospective customers, rather than just solicitations which occur prior to the customer's first deposit of funds;

  • All tape recordings made pursuant to the Interpretive Notice must be retained for at least one year; and

  • Firms meeting the criteria set by the Board must submit all promotional material to NFA at least 10 days prior to its first use.

As in the past, NFA will contact any Member firm which has met the criteria set by the Board and the Member may seek a waiver of these requirements as set forth in the Interpretive Notice.

INTERPRETIVE NOTICE TO COMPLIANCE RULE 2-9:
SUPERVISION OF TELEMARKETING ACTIVITY

Over the years, NFA's Board of Directors has adopted strict and effective rules to prohibit deceptive sales practices, and those rules have been vigorously enforced by NFA's Business Conduct Committees. The Board notes, however, that by their very nature enforcement actions occur after the customer abuse has taken place. The Board recognizes that NFA's goal must be not only to punish such deception of customers through enforcement actions but to prevent it, or minimize its likelihood, through fair and effective regulation.

One NFA rule designed to prevent abusive sales practices is NFA Compliance Rule 2-9. This rule places a continuing responsibility on every Member to supervise diligently its employees and agents in all aspects of their futures activities, including telemarketing. Although NFA has not attempted to prescribe a set of supervisory procedures to be followed by all NFA Members, NFA's Board of Directors believes that Member firms which are identified as having a sales force which has received questionable training in sales practices should be required to adopt specific supervisory procedures designed to prevent sales practice abuse. Rule 2-9 authorizes the Board of Directors to require Members which meet certain criteria established by the Board to adopt specific supervisory procedures designed to prevent abusive sales practices.

The Board believes that in order for the criteria used to identify firms subject to the enhanced supervisory requirements to be useful, those criteria must be specific, objective and readily measurable. The Board also believes that any supervisory requirements imposed on a Member must be designed to quickly identify potential problem areas so that the Member will be able to take corrective action before any customer abuse occurs. The purpose of this Interpretive Notice is to set forth the criteria established by the Board and the enhanced supervisory procedures which are required of firms meeting these criteria.

In developing the criteria, the Board concluded that it would be helpful to review Member firms which had been closed through enforcement actions taken by the CFTC or NFA for deceptive sales practices. The Board's purpose was to identify factors common to these Member firms and probative of their sales practice problems which could be used to identify other Member firms with potential sales practice problems.

One factor identified by the Board as common to these firms and directly related to their sales practice problems is the employment history and training of their sales forces. For many of these Members, a significant portion of their sales force was previously employed and trained by one or more of the other Member firms closed for fraud. The Board believes that the employment history of a Member's sales force is a relevant factor to consider in identifying firms with potential sales practice problems. If a Member firm is closed for fraud related to widespread telemarketing problems, it is reasonable to conclude that the Member's training and supervision of its sales force was wholly inadequate or inappropriate. It is also reasonable to conclude that an AP who received inadequate or inappropriate training and supervision may have learned improper sales tactics which he will carry with him to his next job. Therefore, the Board believes that a Member firm employing such a sales force must have stringent supervision procedures in place in order to ensure that the improper training its APs have previously received does not taint their sales efforts on behalf of the Member.

The Board has determined that a Member will be required to adopt the specific supervisory procedures over its telemarketing activities if:

  • for firms with at least five but less than 10 APs, 40 percent or more of its APs have been employed by one or more Member firms which have been disciplined by NFA or the CFTC for sales practice fraud ("Disciplined Firms");

  • for firms with at least 10 but less than 20 APs, four or more of its APs have been employed by one or more Disciplined Firms;

  • for firms with at least 20 APs, 20 percent or more of its APs have been employed by one or more Disciplined Firms.

For purposes of this requirement, a Disciplined Firm is defined very narrowly to include only those firms which meet the following three criteria:

1. The firm has been formally charged by either the CFTC or NFA with deceptive telemarketing practices;

2. those charges have been resolved; and

3. the firm has been closed down and permanently barred from the industry as a result of those charges.

A list of firms currently meeting the definition of a Disciplined Firm is included. Although this list is current as of the date of this Interpretive Notice, NFA will provide Members with updated lists as necessary.

Those Members meeting the criteria will be required to tape record all telephone conversations which occur between their APs and both existing and potential customers. The Board believes that tape recording these conversations provides these Members with the best opportunity to monitor closely the activities of their APs and also provides these Members with complete and immediate feedback on each AP's method of soliciting customers. Members meeting the criteria must tape record these conversations for a period of one year and must retain such tapes for a period of one year.

In addition, those Members meeting the criteria will be required to file all promotional material, as defined in NFA Compliance Rule 2-29(g), with NFA at least 10 days prior to its first use.

Any Member required to adopt these enhanced procedures may seek a waiver of the enhanced supervisory requirements. NFA may grant such a waiver upon a satisfactory showing that the Member's current supervisory procedures provide effective supervision over its employees including enabling the Member to identify potential problem areas before customer abuse occurs.

A Member firm that does not comply with this Interpretive Notice will violate NFA Compliance Rule 2-9 and will be subject to disciplinary action.

FIRMS THAT HAVE BEEN DISCIPLINED
FOR SALES PRACTICE FRAUD

Apache Trading Corp.

Atlantic Futures Inc.

Atlantic Mercantile Group Inc.

Bachus & Stratton Commodities, Inc.

BP Financial of Boston Inc.

Chicago Commodity Corp.

Chilmark Commodities Corp.

Churchill Group Inc.

Commodity Fluctuations Systems Inc.

Diversified Trading Systems Inc.

Dunhill Investments Corporation

Durkin & Associates Inc.

England, Mark W. d.b.a. Paragon Futures Assoc.

Financial Services Group Inc.

First Commodity Corporation of Boston

First National Monetary Corp.

First Sierra Corporation

Futures Financial Advisors of Palm Beach

Gabriel Brokerage Inc.

Gemini Investments Inc.

Grandview Holding Corp.

Great American Commodities Corp.

Index Services Inc.

International Futures Strategists, Inc.

International Trading Group Ltd.

Investment Syndication Corp.

JCC Inc.

Jones Commodities D.E. Inc.

Masters Trading Organization Ltd.

Montgomery International Trading Inc.

Multivest Options Inc.

Murlas Commodities Inc.

Nationwide Futures Corp.

Neiman-Lloyds Inc.

Option America Inc.

Premex Inc.

Presidential Futures, Inc.

Stephens E. David Commodities Corp.

Stirn, Barry Gerald

Tara Securities Corp.

Trinity Financial Group Inc.

Waters Tan & Co. Inc.

Whitehall Investors International Inc.

Zipkin, William L.

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