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March 27, 2008
Supervision of Forex Promotional Materials: Effective Date of Amendments to the Interpretive Notice Regarding Forex Transactions
NFA has received notice that the Commodity Futures Trading Commission ("CFTC") has approved amendments to the Interpretive Notice entitled "Forex Transactions." The amendments will become effective on July 1, 2008.
The amendments require that the supervisory employee responsible for reviewing a Forex Dealer Member's ("FDM's") promotional materials be under the ultimate supervision of a principal who is also an NFA Associate. As a result of this amendment, an individual principal of the FDM may be held responsible for the use of fraudulent or misleading promotional materials.
The amendments further make clear that an FDM must adopt and enforce written supervisory procedures for reviewing the activities of non-Members with which they do business. Among other things, these procedures must include the regular review of trading being conducted in the accounts solicited, introduced, or managed by these non-Members; procedures for following up on any customer complaints regarding the non-Members; and the regular review of promotional materials used by the non-Members. Just as with an FDM's own promotional activities, the review of the non-Member's activities must be conducted by a supervisory employee that is under the ultimate supervision of a listed principal that is also an NFA Associate.
A copy of the relevant sections with amendments marked is attached for your convenience. Additionally, NFA's November 29, 2007, submission letter to the CFTC contains a more detailed explanation of the changes. You can access an electronic copy of the submission letter at: http://www.nfa.futures.org/news/newsRuleSubLetter.asp?ArticleID=2006.
Questions concerning these changes should be directed to Sharon Pendleton, Director, Compliance (firstname.lastname@example.org or 312-781-1401) or Lauren Brinati, Manager, Compliance (email@example.com or 312-781-1215).
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B. COMPLIANCE RULE 2-36
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5. Communications with the Public and Promotional Material - No Member or Associate shall make any communication with potential or current customers that operates as a fraud or deceit; uses a high-pressure approach; or implies that forex transactions are appropriate for all persons.
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Every Member should adopt and enforce written procedures to supervise communications with potential and current customers and promotional material. A supervisory employee that is, or is under the ultimate supervision of, a listed principal who is also an NFA Associate should review and approve all promotional material and make a written record of such review and approval.12
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7. Doing Business with non-Members - Forex Dealer members are subject to discipline for the activities of most non-Members who solicit or introduce forex customers to the Forex Dealer member or manage accounts for those customers.
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The rule allows NFA to bring a disciplinary action even if the Forex Dealer Member acts diligently and has no knowledge of the third-party's conduct. As a practical matter, however, NFA will not take disciplinary action unless the Forex Dealer Member knew or should have known of the third-party's conduct or failed to exercise due diligence when establishing and maintaining the relationship with the third party.
A Forex Dealer Member should adopt and enforce written procedures to review the activities of non-Member third parties. The procedures should include, among other things, a regular review of the trading being conducted in the accounts solicited, introduced, or managed by these non-Members. The Member should also have procedures for following up on any customer complaints received by the firm, including a written description of the investigation made by the Member and any resolution of the complaint. Further, supervisory procedures should include a regular review of all promotional material used by any non-Member third-party. The member should maintain copies of all promotional materials reviewed, along with a written record of the review conducted and any deficiencies corrected, and make them available for examination for the periods specified in the recordkeeping section of this notice. A supervisory employee that is, or is under the ultimate supervision of, a listed principal who is also an NFA Associate should conduct the review of the non-Member's activities.
12 Under traditional legal principles, Members can also be liable for promotional material promoting forex trading systems developed by third-parties. For example, a Member has direct responsibility for misleading promotional material if the Member prepares or distributes it; has agency responsibility if the system developer is an agent of the Member under established principles of agency law; and has supervisory responsibility if the Member fails to supervise its own employees when linking to a third-party trading system developer's web site, recommending a third-party's trading system, or entering into a referral agreement with a third-party system developer. See Interpretive Notice titled "NFA Bylaw 1101, Compliance Rules 2-9 and 2-29: Guidelines Relating to the Registration of Third-Party Trading System Developers and the Responsibility of NFA Members for Promotional Material That Promotes Third-Party Trading System Developers and their Trading Systems," NFA Manual, paragraph 9055.