Proposed Rule

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Explanation of Proposals

A. Compliance Rule 2-29

Recently, the Board reviewed several types of misleading radio and television advertisements that a small number of Member firms are using with increasing frequency. Though these problem advertisements vary somewhat, their consistent theme is that customers are likely to make substantial profits by following the sponsoring firm's recommendations. For example, these advertisements typically hype options on a particular commodity, such as heating oil or unleaded gas, and suggest that tremendous profits are almost a sure thing based upon current market conditions or "seasonal" price moves. These advertisements, like those highlighted in the Commission's November 3rd Consumer Advisory on deceptive advertising, hurt both the customers naive enough to believe the claims and the reputation of the futures industry.

Though NFA's current compliance rules provide a basis to prosecute the Member firms that sponsor these advertisements, NFA has always felt that it is better to prevent than prosecute fraud. Toward that end, the Board determined that by requiring pre-review and approval of radio and television advertising, staff could curtail those areas in which abuses are most likely to occur. The Board felt that only certain advertisements, those containing the type of abusive content most frequently experienced, should be submitted for approval. Specifically, the Board amended NFA Compliance Rule 2-29 to require any Member firm using radio or television advertisements that make any specific trading recommendations or refer to or describe the extent of profits obtained in the past or that can be achieved in the future to submit the advertisements to NFA's Promotional Material Review Team for its review and approval at least 10 days prior to first use or such shorter period as NFA may allow in particular circumstances.

The proposal to require Members to submit radio and television advertising is similar to requirements imposed by the NASD. The NASD requires all new members to submit all of their advertising materials during their first year of membership. With respect to options, though, the NASD rules require all members to submit all of their promotional materials, unless they have already been approved, 10 days prior to first use or such shorter period as the staff may allow in particular circumstances.

B. Interpretive Notice

The proposed Interpretive Notice discusses the amendment to Compliance Rule 2-29 and provides specific examples of the types of inherently misleading ads that would be disapproved. If any Member firm ran such advertisements without NFA's approval, it could be subject to an immediate disciplinary action.

The Interpretive Notice also addresses "blind ads." As the Commission knows, in a "blind ad" scheme, a Member attempts to evade NFA's advertising requirements by purchasing leads from non-Members which run misleading commercials basically identical to those that have been prosecuted by NFA. These commercials do not, however, identify any particular Member firm and invite the viewer to call a toll-free number to obtain more information. The non-Member then sells the resulting leads to a Member firm, which then claims that it has no responsibility for the content of the ad.

In the past, whenever NFA found Members purchasing leads generated by lead providers whose ads are misleading, staff informed the Member that NFA would hold it vicariously liable for the content of the "blind ads" if it continued to use those leads. This typically causes the Member to stop using the leads but only after NFA has detected the problem.

The Board determined that a more preventative approach would involve an interpretation of NFA Compliance Rule 2-9. NFA Compliance Rule 2-9 requires each Member to diligently supervise its employees and agents in the conduct of their commodities futures activities. The CFTC has brought cases against companies that run "blind ads" and has alleged that they are, in fact, soliciting orders and are required to be registered as IBs. In addition to a Member's responsibilities under NFA Bylaw 1101, Member firms have a supervisory duty to ensure, to the extent possible, that their employees and agents are not purchasing leads from non-Members required to be registered and/or using fraudulent advertising practices. The proposed interpretation to Compliance Rule 2-9 places an affirmative duty upon Member firms that purchase leads to determine if the leads were generated from a provider using any type of advertisement soliciting investments in futures, whose business purpose is the generation and sale of the leads. The proposed Interpretive Notice makes clear that if Member firms purchase leads from such a provider, then the Member must ensure, prior to soliciting any customer with the leads, that the advertising materials used by the lead provider have been submitted to NFA for review and approval. If the advertisements were not approved by NFA, then the Member would not be permitted to solicit any customer with the leads.

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