Notices to Members

May 23, 1996

Deceptive Advertising

NFA Compliance Rule 2-29 governs communications between NFA Members and the public. Among other things, the rule prohibits the use of promotional material which is misleading or deceptive. The Board's purposes in adopting this rule were to protect the public from fraudulent advertising and sales solicitations and to provide Members with specific guidance on the standards by which their promotional material would be judged.

Recently, a relative handful of Members have used strikingly similar promotional materials, usually in the form of radio or television advertising, which clearly violate both the letter and the spirit of NFA Compliance Rule 2-29. The core problem with all of these promotional materials is that they suggest the strong likelihood that customers will reap dramatic profits by investing with the Member firm when, in fact, nothing in the Member's experience provides any basis for those claims. Typically, these commercials employ a variety of techniques to mislead the public:

• Claims Regarding Seasonal Trades -- Some Members have suggested almost certain profits from so-called seasonal trades in, among other things, heating oil and unleaded gas. These ads cite historical data which supposedly shows that certain trades produce dramatic profits year in and year out. Invariably, however, the "historical data" involves different products, different time frames or different fee structures. The most telling point, by far, is that the firm's customers have never experienced the types of profits touted by the Member.
  
• Claims Regarding Historic Price Moves -- Another frequent theme in these misleading commercials or solicitations is the reference to historic price moves in particular commodities with a suggestion that the same record setting move is likely to occur now. For example, these promotional materials refer to times when sugar traded at $.66 per pound, gold at $800 per ounce and silver at $50 per ounce. By suggesting that a similar movement is imminent, the Member projects that customers can expect to double, triple or quadruple their investments in a short period of time. In point of fact, however, the Member has made similar claims in the past and its customers have never experienced such profits.
  
• "Cherry Picked" Trades -- Occasionally, Members seek to entice prospective investors by claiming that their customers have made dramatic profits, for example, citing returns of 50% or more on particular trades. When asked to support these claims, the Members rely on isolated trades in specific customer accounts. What these Members fail to say in their commercials and solicitations is that those profitable trades are not at all representative of the overall performance either of that customer's account or its other customers and that, in fact, the customer referred to in the commercial has actually lost money overall.
  
• Profit Projections -- Over and over, some Members claim that, based on current market conditions, customers can "turn $10,000 into $40,000," or profits of a similar magnitude. Again, however, the fact is that the Member has not produced anything like the projected profits for its customers in the past.

Each of the practices described above presents a distorted and misleading view of the likelihood of customers earning dramatic profits by investing with the Member firm, and each of these practices represents a clear violation of NFA sales practice rules. For those few firms which engage in such practices, the Board wishes to reiterate that Members may not engage in a pattern of advertising or solicitation which makes reference to dramatic profits which could be achieved in the future or could have been achieved in the past by trading futures or options contracts for a particular commodity or in the futures or options markets in general unless the Member can demonstrate to NFA that, based on the past performance of its customers, those claims are not misleading.

Any Member making the types of claims referred to above must be able to demonstrate to NFA upon request that the actual performance of its customers supports those claims. Failure to provide adequate documentation will constitute prima facie evidence that the promotional material is misleading.