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Proposed Rule

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EXPLANATION OF PROPOSED AMENDMENTS

NFA Compliance Rule 2-4 requires Members and Associates to observe high standards of commercial honor and just and equitable principles of trade in conducting their commodity futures business. Similarly, NFA Compliance Rule 2-36(c) requires Forex Dealer Members and their Associates to observe high standards of commercial honor and just and equitable principles of trade in conducting their foreign currency futures and options ("forex") business. Over the years, NFA's Board has provided guidance on certain issues to ensure that Members and Associates understand their responsibilities to observe just and equitable principles of trade and to act honestly, fairly and in the best interests of their customers.

In 1986, the Board issued an Interpretive Notice to provide Members with guidelines relating to the disclosure by FCMs and IBs of costs associated with futures transactions. The Board stated that Compliance Rule 2-4 requires that each FCM Member or, in the case of introduced accounts, the Member introducing the account, make available to its customers, prior to commencement of trading, information concerning the costs associated with futures transactions. NFA's 1986 Notice also recognized that Members may employ various arrangements in establishing their commissions, fees and other charges associated with futures transactions to customers.

Over the years, NFA's Business Conduct Committee ("BCC") has charged several Members and their Associates with violating NFA requirements because they misled customers as to either the amount of commissions or the significant impact of the commission charges on the likelihood of obtaining any profit. Most of these cases have involved the sale to retail customers of commodity options and forex.

The proposed Interpretive Notice notes that commissions for futures transactions have been set competitively since the 1970s, and Members usually base these charges on their costs plus a reasonable profit, and the services provided by the Member. The proposed Notice also notes that the vast majority of NFA Members impose commission charges in a manner commensurate with their costs and the services provided by the Member and adequately disclose and explain to customers commission rates, fees and other charges.

However, in light of the deceptive practices charged in the past, the proposed Notice also describes relevant factors regarding commissions, fees and other charges that the BCC and Hearing Panels will use to determine whether a Member or Associate has presented retail customers with a distorted and misleading view of the likelihood of earning profits by investing with a Member. These factors include:

  • Whether the Member or Associate adequately disclosed the amount of commissions, fees and other charges before the transaction occurred. In evaluating the adequacy of disclosure, the Member or Associate should consider whether the retail customer has little or no experience trading futures, options, and forex, the customer's estimated annual income and net worth, and prior investment experience;

  • Whether the Member or Associate downplayed the significance of the commissions, fees and other charges, especially in connection with any suggestion that the retail customer is likely to reap profits;

  • If the Member or Associate solicits retail customers to engage in commodity option transactions or forex and charges commissions and fees well above the industry norm, what, if any, break-even analysis or additional disclosure has been provided about the significant impact that commissions, fees, and other charges, including mark-ups for forex transactions, have on the likelihood of profit; and

  • Whether the Member or Associate engages in trading practices or recommends transactions or strategies to retail customers that are intended to increase the amount of commissions and fees generated, without serving any economic or other purpose for the customers.

NFA respectfully requests that the Commission review and approve the proposed Interpretive Notice regarding commissions, fees and other charges.

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