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November 25, 1996

Via Facsimile and Regular Mail
Ms. Jean A. Webb
Secretary for the Commission
Commodity Futures Trading Commission
1155 21st Street, N.W.
Washington, D.C. 20581

RE: Interpretation regarding the use of electronic media by Commodity Pool Operators and Commodity Trading Advisors
[61 F.R. 42146]

Dear Ms. Webb:

National Futures Association ("NFA") respectfully submits the following comments in response to a release issued by the Commodity Futures Trading Commission ("Commission") on August 14, 1996. In that release, the Commission requested comment on a proposed Interpretation regarding the use of electronic media by commodity pool operators ("CPOs") and commodity trading advisors ("CTAs"). The release also requested comments on a pilot program which will allow CPOs/CTAs to file disclosure documents electronically and comments on whether the Commission should mandate that all electronically filed documents be filed through one vendor.

NFA fully supports the Commission’s endeavor to effectively regulate the use of electronic media by CPOs and CTAs. Electronic media is a powerful communication tool which, like other forms of communication, is susceptible to abuse. The goal in regulating communications through electronic media should be the same as with any other form of communication -- protecting customers from receiving misleading information. It would seem that the most effective way to accomplish this would be by setting standards governing the use of electronic media that are closely analogous to those which already exist for other areas. Indeed, that is the Commission’s stated goal in the release. In a number of instances, however, the Commission appears to be proposing restrictions and requirements for electronic media which may not be the most effective means of either promoting the use of electronic media or preserving essential customer protections.

The Commission’s release also deals at length with various registration issues related to the Internet and describes various types of activity which either would or would not trigger a registration requirement in the Commission’s view. While these questions are not directly related to NFA’s performance of its day-to-day activities, the release raises a number of questions which should be addressed for clarity’s sake.

ISSUES RELATED TO FORM NEUTRALITY

Requiring Customers to "Scroll Through" the Disclosure Document

CFTC Regulations currently provide that no CPO or CTA may solicit a prospective customer unless the customer has already received a disclosure document. In its release, the Commission states that a CPO or CTA may not solicit prospective customers through the Internet unless the registrant has a website which requires the customer to scroll through the entire disclosure document before he is allowed access to any other substantive information. This seems to us to go well beyond the current requirements and would be analogous to requiring registrants to ensure that prospective customers review each page of the hardcopy document before proceeding with a solicitation.

NFA fully supports the goal of ensuring that customers are encouraged to read meaningful disclosure information about the proposed investment and its risks before proceeding to the promotional material available at a Member’s website. In our view, however, the Commission’s proposal does not accomplish this goal. The simple fact is that you can lead a customer to a disclosure document but you can’t make him read it, regardless of how it is delivered. Requiring a customer to scroll through a document electronically does not alter that basic fact, especially since customers can scroll through a document with a click of a mouse without reading any of it. The only way to encourage customers to read appropriate disclosures is to provide them in a meaningful and concise way. NFA, therefore, believes that the introductory page of the website should include a description of the basic risks involved in the product being offered. This risk disclosure section could be based largely on the risk disclosure language currently required by Commission regulations. The introductory page should also include a short but prominent statement that the disclosure document is available and should be read before proceeding further.

Continued Access to the Document

The Commission suggests in its release that once a CPO or CTA delivers a disclosure document electronically, it may need to make that document accessible to the recipient electronically for a period of nine months. NFA believes that this may prove to be problematic because it may result in a CPO/CTA having multiple versions of its disclosure document on its website at one time. NFA agrees that a recipient of an electronically delivered document should continue to have access to the document. NFA suggests that the best way to accomplish this is to require a CPO/CTA to keep its most current version of its disclosure document on its website. In addition, in those instances where a customer who received a prior document requests a new copy of that document, the CPO/CTA should be required to provide a copy of that document to the customer in either electronic or hardcopy form.

Disclosures Related to Electronic Delivery of Disclosure Documents

The Commission proposes that CPOs or CTAs who intend to deliver disclosure documents electronically must first disclose six points to the prospective customer: (1) that the CPO or CTA is required to deliver a disclosure document at or prior to the time of the solicitation; (2) that the customer may choose to receive the document electronically or in hardcopy; (3) the specific medium by which the electronic delivery will be made; (4) the potential costs, such as on-line access charges, of electronic delivery; (5) the types of other documents, such as account statements, to be delivered electronically; and (6) the customer’s right to revoke his consent to electronic delivery. NFA agrees with the basic point that customers should be able to make an informed choice as to whether they want the document delivered electronically or not, but the proposed disclosures seem unnecessarily cumbersome. Specifically, with respect to the disclosure regarding potential costs, NFA believes that the Commission should clarify that it does not expect registrants to provide specific estimates of the cost. Obviously, given the number of variables that impact the cost, including costs that are beyond the CPO or CTA’s control because they are imposed by the recipients’ service provider, it would be impractical to expect a registrant to calculate this amount. NFA believes that the Interpretation should simply provide that customers be given a clear description of costs involved in electronic delivery of the disclosure document.

The disclosures required under points 5 and 6 relate to obtaining a customer’s consent to send account statements electronically. NFA believes that it is premature to request a customer to make this decision at the time of the initial solicitation. NFA suggests that the Commission clarify that these disclosures need not be provided until the customer makes his investment decision.

Use of PIN Numbers to Acknowledge Receipt of Disclosure Document

The Commission proposes that each customer receiving a disclosure document electronically must apply for and receive a PIN number from the CPO or CTA to properly acknowledge receipt of the document, rather than merely acknowledge receipt through an E-mail message. The Commission compares the use of PINs in this context with the electronic delivery of certain financial statements. With financial statements, though, PINs are used so that the Commission and the SROs can hold the individuals responsible for sending the information liable for any incorrect submissions. NFA fails to see any corresponding need for customers to use PINs in acknowledging receipt of the disclosure document. The purpose of the acknowledgment of the receipt of disclosure documents is to ensure that the registrant has documentation which establishes that a disclosure document has been delivered. With hardcopy documents, the CPO or CTA receives the customer’s signed acknowledgment. An E-mail message from the customer would appear no less reliable and would be no more susceptible to forgery by the registrant. Therefore, NFA questions whether there is a need for heightened security for electronically delivered acknowledgments.

If the Commission believes that some method of verification is necessary, however, NFA cautions the Commission not to tie itself and the industry into one specific method. It is NFA’s understanding that there are a number of ways to provide the desired level of security, and the Commission should give serious consideration to the views of the industry regarding available technology. In fact, NFA suggests that the Commission set a standard of reliability rather than specifying a specific method which must be used.

OTHER POINTS OF CLARIFICATION

Testimonials by Third Parties

The Commission’s release makes the obvious point that the use of testimonials purporting to be from third parties would be fraudulent if they were, in fact, generated by the CPO or CTA. The Commission’s statement should not be read to suggest, however, that there are no other potential problems involving third party testimonials. NFA’s experience has shown that third party testimonials can be misleading in a number of ways, even if they are not generated by the Member firm. For example, if the customer providing the testimonial is "cherry picked" by the firm. The Commission should clarify its statement so that it does not inadvertently create a safe harbor for third party testimonials.

Publishers and Producers of Electronic Data of General and Regular Dissemination

In its release, the Commission notes that the Act excludes from the definition of CTA publishers or producers of print or electronic data "of general and regular dissemination," provided that the furnishing of that data is "solely incidental" to their regular business. The release goes on to explain how the Commission has interpreted the phrases "general and regular dissemination" and "solely incidental" in this context. The release states that if a publication focuses on futures trading, it will not be considered a publication "of general and regular dissemination." The release also states that if a publication has a special focus on futures transactions, the advice provided will not be considered "solely incidental" to the publisher’s business. The distinction between these two prongs of the exclusion is, thus, somewhat blurred -- a point which the Commission may wish to address when it finalizes the Interpretation.

Use of Hyperlinks

The Commission suggests that a business which maintains a website which contains a hyperlink to another futures-related website could be required to be registered because of the hyperlink. The Commission explains that:

"This would be the case, for example, where the operator of a website provides editorial comment about the hyperlinks or provides a list of hyperlinks that represent a preselected, defined category of persons or services, whose attributes or qualifications are thereby highlighted."

We would agree with the Commission's observation that in its related footnote that the use of a hyperlink which "communicate[s] the views of the website operator as to the quality of the services" referred to at the hyperlinked site could constitute a solicitation. The text of the release quoted above, however, goes much further. Most hyperlinks are, by their very nature, links to a "preselected, defined" category of persons, no matter how neutrally they are labeled. The suggestion that any such hyperlink could trigger a registration requirement is inconsistent with the more focused and, in our view, more appropriate approach described in the footnote. NFA believes that the Commission should resolve the ambiguity between the text and the footnote and clarify that registration is required where a hyperlink is constructed in such a way as to recommend the services of a specific CTA or CTAs.

Definition of Solicitation

In its discussion of the types of conduct which can trigger a registration requirement, the Commission deals with the issue of firms which sell the names and addresses of potential customers to registered firms. As the Commission is well aware, this general topic has been an issue of great concern to NFA. We have noted repeated instances in which unregistered firms air "blind ad" infomercials. These commercials do not name any particular firm but, instead, urge the customer to call a toll free number for more information on some form of "can’t miss" investment in futures or options. This customer "lead" is then sold to a registered firm, which, in effect, is using the "blind ad" company to circumvent NFA and CFTC advertising rules. NFA always has and will continue to support the Commission in every way possible in combatting this form of fraud.

The current language of the proposed release, however, reaches well beyond the situation described above. The Commission states that "the operator of a website that accepts and forwards to a CTA or CPO the names and addresses of potential customers and receives compensation for such referrals from the CTA or CPO, would be soliciting on behalf of the CTA or CPO." This language draws no distinctions at all based on how the vendor obtained the names and addresses, a point of critical importance. Certainly, a website operator who uses the Internet to solicit customers to invest and then sells the names of interested customers may well be required to be registered. By contrast, a publisher of a magazine or operator of a website totally unrelated to futures would be free to sell its subscribers list to a registered firm without itself being registered.

Hardcopy Retention of Electronic Media Presentations

Under the Interpretation, a CTA or CPO would be required to retain any material appearing on-line in a hardcopy form. This requirement seems both antiquated and unnecessary. NFA recognizes, however, that the requirement is dictated to some extent by the fact that Commission Regulation 1.31 requires the use of certain specific forms of technology in connection with the optical storage of certain types of records. The problem with this approach is that as the specific technology mandated by the rule becomes outmoded, so does the rule itself. NFA recommends that the Commission amend Regulation 1.31 to state the general standards or reliability and accessibility required for optical storage of records, rather than a specific technology which must be used to meet those standards. This approach would provide far greater flexibility in dealing with constantly evolving technology. NFA would be happy to work with the Commission in that effort.

PILOT PROGRAM FOR ELECTRONIC FILING

The Commission’s release also announced the Commission’s intention to begin a pilot program to allow CPOs and CTAs to electronically file their disclosure documents with the Commission. NFA applauds the Commission’s decision to initiate this pilot program and encourages the Commission to expand the program to other documents when feasible. NFA will, of course, also accept documents filed electronically by CPOs and CTAs which choose to file electronically with the Commission. NFA also asks that the Commission provide NFA with an electronic mail copy of any comment letters sent to registrants.

ELECTRONIC FILING THROUGH A PRIVATE VENDOR

The Commission also asks for comment on whether it should consider mandating that all electronically filed documents be filed through one private vendor. NFA believes that granting such a monopoly raises serious concerns. First, the private vendor would expect to be compensated for its services, which would either result in increased costs to the Commission (if it pays for the services) or to CPOs and CTAs (if the vendor charges a fee for using the system). Second, depending on the vendor’s system requirements, CPOs and CTAs could be subject to additional costs to update their computer systems to be compatible with the vendor’s system. NFA is not aware of any potential regulatory benefits which would justify these additional costs. NFA also notes that -- unlike the SROs who are currently exercising responsibilities delegated by the Commission -- a private vendor would not be subject to the Commission’s oversight. Furthermore, if the private vendor selected is affiliated in any way with a Commission registrant, a number of other issues are raised. A private vendor could be in the possession of confidential or sensitive information -- such as draft disclosure documents and letters between the CPO/CTA and Commission staff -- related to other registrants. If the vendor is affiliated with a registrant, the vendor’s access to information filed by the registrant’s competitors raises a number of competitive issues. In addition, if the Commission used a vendor who is affiliated with a registrant, the Commission would be in the very compromising position of relying on a firm with ties to a firm it regulates. If, for whatever reason, the Commission feels that electronically filed disclosure documents should be funneled through an outside source, it would be more appropriate to assign that responsibility to NFA, rather than a private vendor.

SUMMARY

NFA believes the Commission can achieve its goal of effectively regulating the Internet by taking a more targeted approach to guard against potential fraud. NFA can assist the Commission in this endeavor with regard to NFA Members by stringently enforcing current NFA rules and, by possibly enhancing some current rules. For example, under the interpretation of NFA Rule 2-9 relating to supervision of telemarketing, any firm subject to the additional supervisory requirements is required to presubmit all promotional material to NFA. This would include material disseminated over the Internet. In addition, NFA is considering amending NFA Compliance Rule 2-29 to authorize NFA to require any Member to presubmit its promotional material to NFA upon NFA’s request. NFA also believes it would be helpful to send periodic Notices to Members reminding them that NFA Rules apply to Internet activities and describing problems we have encountered with the Internet.

NFA recognizes that a majority of the problems arising from Internet activities involve non-Members over which NFA has no jurisdiction. NFA is willing to assist the Commission in guarding against abuses and will continue to advise the Commission whenever its surveillance of the Internet uncovers questionable solicitations by non-Members.

In closing, NFA wishes to offer its continued support of the Commission’s efforts to regulate this growing area and to provide its assistance in any manner the Commission sees fit.

Very truly yours,

Daniel J. Roth
General Counsel

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