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EXPLANATION OF PROPOSED AMENDMENTS

Based upon our continuing experience with forex promotional material, NFA is clarifying the Interpretive Notice entitled "Forex Transactions with Forex Dealer Members" (the "Forex Interpretive Notice"). These amendments will ensure that Forex Dealer Members ("FDMs") and other Members who solicit or manage forex accounts understand their obligations and responsibilities under NFA Compliance Rule 2-36 ("Rule 2-36")1 and NFA Compliance Rule 2-39.

Compliance Rule 2-29 ("Rule 2-29") and related Interpretive Notices govern promotional materials and communications with the public relating to on-exchange transactions. Rule 2-29, however, is not applicable to a Member's off-exchange foreign currency business. Accordingly, in February 2002, NFA's Board of Directors adopted Rule 2-36, which, among other things, provides that affected Members may not engage in conduct that would act as a fraud or deceit. In May 2003, the Board adopted the Forex Interpretive Notice that expands upon these requirements by providing guidance with regard to communications with the public and promotional materials.

In the Forex Interpretive Notice, NFA sets forth general principles for ensuring that promotional materials are not misleading and includes some of the most common concerns, many of which are also found in Rule 2-29 and the related interpretive notices. Based on recent audits and promotional material reviews, NFA has concluded that the Forex Interpretive Notice should clarify that other practices that are deceptive or misleading under Rule 2-29 are also deceptive and misleading under Rule 2-36. Additionally, there are certain practices unique to forex that should, likewise, be explicitly identified as deceptive and misleading.

For example, NFA has recently begun to see testimonials in forex promotional material. Just like testimonials relating to on-exchange trading, these can be misleading when they do not represent comparable accounts, fail to state that past results are no guarantee of future success, and do not identify that the testimonial was provided in return for compensation (if that is the case). Some examples of forex testimonials include statements such as: "our son loves trading and should be self-supporting by the time he is 18" and "within a month of your training class, my profit doubled." NFA also has started to see certain forex material that cherry picks accounts that have unusually positive performance when most comparable accounts have not seen results even close to the stated performance and, in most cases, had a negative return.

Additionally, NFA is seeing the use of statements of opinions in soliciting customers for forex. For example, NFA has seen promotional materials with statements that an FDM's trading platform "provides the best prices for both buyers and seller in an open, unbiased environment." Other statements have included claims that "Forex is probably the fairest market on earth." NFA has consistently held that statements of opinion, such as the preceding examples, are misleading if they are not clearly identified as statements of opinion and they do not have a reasonable basis in fact.

The above examples are practices that have been explicitly identified as deceptive or misleading in the context of on-exchange transactions. NFA believes that they should likewise be explicitly set forth as deceptive and misleading with regard to forex transactions.

An issue that is unique to dealer markets is the touting of "no-slippage" or "guaranteed fills." Experience, however, has shown that the FDMs that make these claims do not live up to them. NFA has found that FDMs have adjusted the prices at which customer transactions have been executed from those shown on the trading platform at the time the customer placed the order. In some cases, the FDM made the adjustment well after it had confirmed the trade with the customer. In these circumstances the FDM indicated that there were "quoting errors" or delays in receiving feeds from their pricing banks and that the prices displayed on the platform or at which the trade was executed did not represent the actual market at that time. Moreover, FDMs' standard account opening agreements contain numerous clauses that provide the FDM with authority to adjust customer accounts unilaterally when the FDM determines that the trade is not representative of market prices. Regardless of whether an adjustment is made to a customer's account, making a claim of no-slippage or guaranteed fills is misleading and deceptive when an FDM retains the ability to adjust customer accounts unilaterally.2

The amendments also require that certain radio and television advertisements be submitted to NFA for review and prior approval, as is required for Members offering on-exchange futures. While NFA is not aware of any television or radio advertisements currently in use for forex activities that would fall under this requirement, it is best to act now before NFA see problems similar to those that required this rule with regard to on-exchange activities.

NFA respectfully requests that the Commission review and approve the proposed amendments to the Interpretive Notice to Compliance Rule 2-36 regarding forex transactions with FDMs.


1 Rule 2-36 also indirectly reaches the activities of non-Members who do business with FDMs. Pursuant to Rule 2-36, an FDM is subject to disciplinary action for the activities of persons that solicit and manage accounts held by the FDM if the solicitor or account manager is not an NFA Member and is not otherwise regulated. FDMs are expected to exercise due diligence when establishing and maintaining relationships with such non-Members.

2 Since the dealer sets the price, it is possible for an FDM to actually guarantee no slippage. Accordingly, NFA believes it is more appropriate to address the circumstances under which the FDM makes the claim rather than banning the claim altogether.

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