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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
- 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
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.
FOR SALES PRACTICE FRAUD