Brokers-only rule for 'cold calling' prospects opposed NASD would prohibit calls by nonbrokers as way to halt abuses


WASHINGTON -- Brokerages are lining up to oppose a plan that would require them to use only registered brokers for stock sales "cold calls," saying the measure would be too expensive and could hurt the industry's growth.

The National Association of Securities Dealers, in a fight against abusive cold-calling practices, has proposed a rule that would forbid nonbrokers to make sales calls to potential customers.

"We are concerned that adoption of the proposed interpretation would have a negative impact on the legitimate sales of NASD member firms," Merrill Lynch & Co. senior counsel Eneida Rosa wrote to the NASD.

The NASD says requiring firms to use registered brokers would help ensure that they give prospective customers appropriate disclosures and provide other investor protections that unregistered "cold callers" either don't know about or ignore when pitching often little-known stocks to investors.

In comments filed with the NASD about the proposal, however, the Securities Industry Association and many brokerage firms said the plan would be burdensome and unnecessary. Current rules about business conduct and telemarketing, they said, already govern brokerage sales practices and can provide enough protection for investors.

"Rather than adopting policies that would eliminate calls made by unregistered persons to prospective customers, the current cold-calling restrictions should remain in effect, and, when appropriate, be more aggressively enforced," Merrill Lynch's Rosa wrote.

The NASD, which regulates U.S. brokers and runs the Nasdaq stock market, said it is considering whether to forward the proposal to the Securities and Exchange Commission, which would have to approve the changes before they can take effect.

The NASD said stricter rules are needed because its staff has found evidence of abusive cold-calling practices -- "such as high pressure and aggressive sales pitches, often delivered by unregistered salespeople using specially designed scripts." Under the proposal, nonbroker employees could only call current customers for non-sales-related reasons, such as inviting them to firm events.

In one of the NASD's largest cases involving alleged cold-calling violations, last year the association charged 33 people from Stratton Oakmont Inc., a defunct New York brokerage, with defrauding at least 70 customers through aggressive telemarketing and other rules violations.

The NASD alleged that Stratton Oakmont's president and 32 employees used scripts as part of a telemarketing effort to sell speculative securities.

NASD's proposed restrictions won support from the North American Securities Administrators Association Inc., an organization of state securities regulators. That group said it agrees with the NASD that current rules don't adequately address rampant cold-calling problems.

In letters to the NASD, state regulators said a prohibition against cold calls by unregistered salespeople would make violations easier to detect and help enforcement of registration requirements.

"It is imperative that cold-callers be properly tested and licensed as to knowledge of the industry and should be closely supervised by principals of the firm," Joseph Borg, director of the Alabama Securities Commission, said in a letter.

The NASD proposed the cold-calling restrictions in September and accepted comments on the rules through the end of 1997. Of 44 letters received, 31 opposed and 13 supported the rule changes.

Pub Date: 5/06/98

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