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Part 2 - RULES GOVERNING THE BUSINESS CONDUCT
OF MEMBERS REGISTERED WITH THE COMMISSION
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Part 2 - RULES GOVERNING THE BUSINESS CONDUCT OF MEMBERS REGISTERED WITH THE COMMISSION
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[(b)] (2) The Associate is sponsored by a registered broker-dealer and is qualified to act as a branch office manager under the rules of either the New York Stock Exchange or National Association of Securities Dealers.
(b) Each Member registered as a broker-dealer under Section 15(b)(11) of the Exchange Act must have at least one designated security futures principal. No such Member shall designate a person as a security futures principal unless:
(2) The person is a Member or an Associate of the Member as defined in Bylaw 301(b); and
(3) The person has taken and passed the "Branch Manager Exam-Futures."
RULE 2-8. DISCRETIONARY ACCOUNTS.
No Member or Associate shall exercise discretion over a customer's commodity futures account unless the customer or account controller has authorized the Member or Associate, in writing (by power of attorney or other instrument) to exercise such discretion. No Member or Associate shall exercise discretion with regard to foreign futures or foreign options transactions on behalf of a foreign futures or foreign options customer unless the customer or account controller has specifically authorized the Member or Associate, in writing, to exercise discretion with regard to foreign futures or foreign options transactions. The Member or Associate does not need written authorization to exercise discretion with regard to time and price only. Each Member must maintain records which clearly identify which of the Member's accounts are accounts over which the Member or any Associate thereof has discretionary authority.
(b) Review of Discretionary Trades.
Each futures trade initiated in an account that a Member or Associate has written authorization to trade shall be presumed to have been made pursuant to that trading authorization unless otherwise indicated, in writing, at the time the trade was placed. Each Member initiating such trades (other than a Member who employs only one individual having discretionary authority if that individual is also the only principal who supervises futures activity) must adopt and enforce written procedures:
(2) Which require such partner, officer, director, branch office manager or supervisory employee or designated security futures principal to make a written record that such review procedures were performed.
Discretionary trading activity must be regularly reviewed, and a written record of the review must be made, as required above.
(c) Minimum Experience Requirement.
No Member FCM or IB shall allow an Associate to exercise discretion over a customer's commodity futures account unless that Associate has been continuously registered under the Act for a minimum of two years and has worked in such registered capacity for that period of time. This requirement shall not apply to any individual registered as a CTA. This requirement may, in NFA's discretion, be waived upon a showing that the Associate has equivalent experience. Any Member seeking such a waiver may submit a written request to the Compliance Director and all such requests shall be ruled upon by a three-member panel consisting of three members of the Business Conduct Committee and/or the Hearing Committee, said members to be appointed by the Board from time to time. The decision of the panel shall be final and shall be based upon the written submissions and the views of the Compliance Director. The panel shall communicate its decision to the Compliance Director or a person designated by the Compliance Director, who shall then inform the Member seeking the waiver. An Associate who has been determined to have equivalent experience pursuant to the rules of any contract market Member of NFA having a similar minimum experience requirement shall be deemed to have satisfied the requirement of this Rule.
(d) Third-Party Account Controllers.
No FCM or IB shall accept an order from a third party, not an Associate of the FCM or IB, without first obtaining a copy of the account controller's written trading authorization or a written acknowledgment from the customer that such authorization has been given.
The provisions of sections (b), (c) and (d) of this Rule shall not apply when the individual who owns the account and the individual exercising discretion are members of the same family (a spouse, parent, child, grandparent, grandchild, brother, sister, aunt, uncle, nephew, niece or in-law).
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RULE 2-22. PROHIBITED REPRESENTATIONS.
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RULE 2-26. FCM AND IB REGULATIONS.
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RULE 2-29. COMMUNICATIONS WITH THE PUBLIC AND PROMOTIONAL MATERIAL.
No Member or Associate shall make any communication with the public which:
(2) employs or is part of a high-pressure approach; or
(3) makes any statement that futures trading is appropriate for all persons.
(b) Content of Promotional Material.
No Member or Associate shall use any promotional material which:
(2) contains any material misstatement of fact or which the Member or Associate knows omits a fact if the omission makes the promotional material misleading;
(3) mentions the possibility of profit unless accompanied by an equally prominent statement of the risk of loss;
(4) includes any reference to actual past trading profits without mentioning that past results are not necessarily indicative of future results; [or]
(5) includes any specific numerical or statistical information about the past performance of any actual accounts (including rate of return) unless such information is and can be demonstrated to NFA to be representative of the actual performance for the same time period of all reasonably comparable accounts and, in the case of rate of return figures, unless such figures are calculated in a manner consistent with that required under CFTC Regulation 4.25(a)(7)(i)(F); or
(6) includes a testimonial that is not representative of all reasonably comparable accounts, does not prominently state that the testimonial is not indicative of future performance or success, and does not prominently state that it is a paid testimonial (if applicable).
(c) Hypothetical Results.
(1) Any Member or Associate who uses promotional material which includes a measurement or description of or makes any reference to hypothetical performance results which could have been achieved had a particular trading system of the Member or Associate been employed in the past must include in the promotional material the following disclaimer prescribed by NFA's Board of Directors:
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
If a Member or Associate has either less than one year of experience in directing customer accounts or trading proprietary accounts, then the disclaimer must also contain the following statement:
(2) Any Member or Associate who uses promotional material which includes a measurement or description of or makes any reference to a hypothetical composite performance record showing what a multi-advisor account portfolio or pool could have achieved in the past if assets had been allocated among particular trading advisors must include in the promotional material the following disclaimer prescribed by NFA's Board of Directors instead of the disclaimer prescribed by Section (c) (1) of this Rule:
ONE OF THE LIMITATIONS OF A HYPOTHETICAL COMPOSITE PERFORMANCE RECORD IS THAT DECISIONS RELATING TO THE SELECTION OF TRADING ADVISORS AND THE ALLOCATION OF ASSETS AMONG THOSE TRADING ADVISORS WERE MADE WITH THE BENEFIT OF HINDSIGHT BASED UPON THE HISTORICAL RATES OF RETURN OF THE SELECTED TRADING ADVISORS. THEREFORE, COMPOSITE PERFORMANCE RECORDS INVARIABLY SHOW POSITIVE RATES OF RETURN. ANOTHER INHERENT LIMITATION ON THESE RESULTS IS THAT THE ALLOCATION DECISIONS REFLECTED IN THE PERFORMANCE RECORD WERE NOT MADE UNDER ACTUAL MARKET CONDITIONS AND, THEREFORE, CANNOT COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FURTHERMORE, THE COMPOSITE PERFORMANCE RECORD MAY BE DISTORTED BECAUSE THE ALLOCATION OF ASSETS CHANGES FROM TIME TO TIME AND THESE ADJUSTMENTS ARE NOT REFLECTED IN THE COMPOSITE.
If a Member or Associate has less than one year of experience allocating assets among particular trading advisors, then the disclaimer must also contain the following statement:
(3) Any Member or Associate who uses promotional material which includes a measurement or description of or makes any reference to hypothetical performance results which could have been achieved had a particular trading system of the Member or Associate been employed in the past must include in the promotional material comparable information regarding:
(ii) if the Member has less than one year of experience in directing customer accounts, past performance results of his proprietary trading over at least the last five years or over the entire performance history if less than five years.
(4) No Member or Associate may use promotional material which includes a measurement or description of or makes any reference to hypothetical performance results which could have been achieved had a particular trading system of the Member or Associate been employed in the past if the Member or Associate has three months of actual trading results for that system.
(5) Any Member or Associate utilizing promotional material containing hypothetical performance results must adhere to all the requirements contained in the Board's Interpretive Notice relating to this issue.
(6) These restrictions on the use of hypothetical trading results shall not apply to promotional material directed exclusively to persons who meet the standards of a "Qualified Eligible Person" under CFTC Regulation 4.7.
(d) Statements of Opinion.
Statements of opinion included in promotional material must be clearly identifiable as such and must have a reasonable basis in fact.
(e) [Written] Supervisory [Procedures] Requirements.
Every Member shall adopt and enforce written procedures to supervise its Associates and employees for compliance with this Rule. [Such procedures shall require prior review and approval of all promotional material] Prior to its first use, all promotional material shall be reviewed and approved, in writing, by an officer, general partner, sole proprietor, branch office manager or other supervisory employee other than the individual who prepared such material (unless such material was prepared by the only individual qualified to review and approve such material). If the Member is registered as a broker-dealer under Section 15(b)(11) of the Exchange Act and the promotional material specifically refers to security futures products, the individual reviewing and approving the promotional material must be a designated security futures principal.
Copies of all promotional material along with a record of the review and approval required under paragraph (e) of this Rule and supporting materials for any results described under paragraphs (b)(5)-(6) or (c) of this Rule must be maintained by each Member and be available for examination for the periods specified in CFTC Regulation 1.31, measured from the date of the last use. Each Member who uses promotional material of the types described in paragraph (b)(5)-(6) or (c) of this Rule shall demonstrate the basis for any reported results to NFA upon request.
(g) Filing with NFA.
The Compliance Director may require any Member for any specified period to file copies of all promotional material with NFA promptly after its first use.
(h) Radio and Television Advertisements.
No Member shall use or directly benefit from any radio or television advertisement that makes any specific trading recommendation or refers to or describes the extent of any profit obtained in the past or that can be achieved in the future unless the Member submits the advertisement to NFA's Promotional Material Review Team for its review and approval at least 10 days prior to first use or such shorter period as NFA may allow in particular circumstances.
(2) "Futures account, agreement or transaction" includes futures accounts and orders, commodity pool participations, agreements to direct or guide trading in futures accounts, and agreements and transactions involving the sale, through publications or otherwise, of non-personalized trading advice concerning futures.
(j) Security Futures Products
In addition to the other requirements of this Rule, Members registered as broker-dealers under Section 15(b)(11) of the Exchange Act and their Associates shall not use any promotional material that specifically refers to security futures products unless the promotional material:
(1) prominently identifies the Member;
(2) includes the date that the material was first used;
(3) provides contact information for obtaining a copy of the disclosure statement for security futures products;
(4) states that security futures products are not suitable for all customers;
(5) does not include any statement suggesting that security futures positions can be liquidated at any time;
(6) does not include any cautionary statement, caveat, or disclaimer that is not legible, that attempts to disclaim responsibility for the content of the promotional material or the opinions expressed in the material, that is misleading, or that is otherwise inconsistent with the content of the material;
(7) discloses the source of any statistical tables, charts, graphs, or other illustrations from a source other than the Member, unless the source of the information is otherwise obvious;
(8) states that supporting documentation will be furnished upon request if it includes any claims, comparisons, recommendations, statistics or other technical data;
(9) if soliciting for a trading program that will be managed by an FCM or IB or Associate of an FCM or IB, it includes the cumulative performance history of the Member's customers who have used the trading program; provided, however, that if the Member does not have customers who have traded the program through the Member, the promotional material must state that the trading program is unproven and must include all of the information required by section (c) of this Rule and the Interpretive Notice on the Use of Promotional Material Containing Hypothetical Performance Results (9025);
(10) refers to past recommendations regarding security futures products, the underlying securities, or a derivative thereof only if it sets forth all recommendations as to the same type, kind, grade, or classification of securities (including security futures products and other security derivatives) made by the Member or Associate within the last year; which information must include the name of each security recommended with the date and nature of each recommendation (e.g., whether to buy or sell), the price at the time of the recommendation, the price at which or the price range within which the recommendation was to be acted upon, and the general market conditions during the period covered if the promotional material refers to past recommendations regarding security futures products, the underlying securities, or a derivative thereof;
(11) includes current recommendations regarding security futures products only if: (i) the Member has a reasonable basis for the recommendation; (ii) the material discloses all material conflicts of interest created by the Member's or Associate's activities in the underlying security; and (iii) the material contains contact information for obtaining the list of prior recommendations described in subsection (10);
(12) includes only a general description of the security futures products for which accounts, orders, trading authorization, or pool participations are being solicited; the name of the Member; and contact information for obtaining a copy of the current disclosure statement for security futures products; provided, however, that this subsection does not apply if the promotional material is accompanied or preceded by the disclosure statement for security futures products; and
(13) has been submitted to NFA for review and approval at least ten days prior to first use if it reaches or is designed to reach a public audience through mass media (e.g., newspapers, magazines, radio, television, or other electronic media). This requirement does not apply to any promotional material in which the only reference to security futures products is contained in a listing of the Member's services.
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RULE 2-30. CUSTOMER INFORMATION AND RISK DISCLOSURE.
(a) Each Member or Associate shall, in accordance with the provisions of this Rule, obtain information about its futures customers who are individuals and provide such customers with disclosure of the risks of futures trading.
(b) The Member or Associate shall exercise due diligence to obtain the information and shall provide the risk disclosure at or before the time a customer first opens a futures trading account to be carried or introduced by the Member, or first authorizes the Member to direct trading in a futures account for the customer. The Member shall provide a copy of the disclosure statement for security futures products at or before the time the Member approves the account to trade security futures products.
(c) The information to be obtained from the customer shall include at least the following:
(2) the customer's current estimated annual income and net worth;
(3) the customer's approximate age; [and]
(4) an indication of the customer's previous investment and futures trading experience[.];
(5) whether the customer's account is for speculative or hedging purposes;
(6) the customer's employment status (e.g., name of employer, self-employed, retired);
(7) the customer's estimated liquid net worth (cash, securities, other);
(8) the customer's marital status and number of dependents;
(9) such other information used or considered to be reasonable by such Member or Associate in making recommendations to the customer.
(d) The risk disclosure to be provided to the customer shall include at least the following:
(2) the Disclosure Document required by CFTC Regulation 4.31, if the Member is required by that Regulation to provide it;
(3) the Options Disclosure Statement required by CFTC Regulation 33.7, if the Member is required by that Regulation to provide it; and
(4) the Disclosure Document required by CFTC Regulation 31.11, if the Member is required by that Regulation to provide it.
(e) In the case of an account which is introduced by an FCM or IB or for which a CTA directs trading, it shall be the responsibility of the Member soliciting the account to comply with this Rule.
(f) A Member or Associate shall be entitled to rely on the customer [as the sole source] for the information obtained under Section (c) of this Rule and shall not be required to verify such information, except as provided in section (j)(2) of this rule.
(g) Each Member or Associate shall make or obtain a record containing the information obtained under Section (c) of this Rule at the time the information is obtained. If a customer declines to provide the information set forth in Section (c) of this Rule, the Member or Associate shall make a record that the customer declined, except that such a record need not be made in the case of a non-U.S. customer unless such customer trades security futures products. Subject to the provisions of Section (i) of this Rule, a Member may open, introduce or agree to direct a futures trading account for a customer only upon the approval of a partner, officer, director, branch office manager or supervisory employee of the Member. Each Member shall keep copies of all records made pursuant to this Rule in the form and for the period of time set forth in CFTC Regulation 1.31.
(h) Each Member shall establish and enforce adequate procedures to review all records made pursuant to this Rule and to supervise the activities of its Associates in obtaining customer information and providing risk disclosure.
(i) Nothing herein shall relieve any Member from the obligation to comply with all applicable CFTC and SEC Regulations and NFA Requirements.
(j) Members that are not also members of NASD Regulation, Inc. and their Associates shall adhere to the following additional requirements relating to accounts for customers that trade security futures products:
(2) A Member or Associate shall forward the background and financial information upon which the customer's account has been approved for trading security futures products to each customer who is an individual, unless the information has been obtained in writing from the customer, for verification of accuracy within fifteen days after the customer's account has been approved. A copy of the background and financial information on file with the Member shall also be sent to each customer who is an individual for verification within fifteen days after the Member becomes aware of any material change in the customer's financial status. In all cases, absent notice to the contrary from the customer, the information is deemed verified.
(3) No FCM or IB Member or Associate thereof shall recommend to a non-institutional customer a transaction in security futures products or a particular trading strategy relating to such products without making reasonable efforts to obtain current information regarding the customer's financial status and investment objectives; provided, however, that this requirement does not apply to transactions in discretionary accounts. For purposes of this requirement, a non-institutional customer is any customer who is not:
(ii) an investment advisor registered either with the Securities and Exchange Commission under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or any agency or office performing like functions) or a registered commodity trading advisor;
(iii) an investment company exempt from registration under the Investment Company Act of 1940, a commodity pool operator exempt from registration under the Commodity Exchange Act, a commodity pool operated by a commodity pool operator exempt from registration under the Commodity Exchange Act, an investment advisor exempt from both federal and state registration under the Investment Advisers Act of 1940, or a commodity trading advisor exempt from registration under the Commodity Exchange Act;
(iv) a registered broker-dealer or futures commission merchant; or
(v) any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million.
(4) No FCM or IB Member or Associate thereof shall recommend to any customer a transaction in security futures products or a particular trading strategy relating to such products without reasonable grounds for believing that the recommendation or strategy is not unsuitable for the customer on the basis of the customer's current investment objectives, financial situation and needs, and any other information known by the Member or Associate.
(5) No FCM or IB Member or Associate shall recommend a security futures transaction to a customer unless the person making the recommendation has a reasonable basis for believing, at the time of making the recommendation, that the customer has such knowledge and experience in financial matters that the customer may reasonably be expected to be capable of evaluating the risks of the recommended transaction, and is financially able to bear the risks of the recommended transaction.
(6) No Member or Associate exercising discretion over an account may effect security futures transactions that are excessive in size or frequency in view of the customer's investment objectives and financial situation.
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RULE 2-37. SECURITY FUTURES PRODUCTS.
This rule applies to Members registered as broker-dealers under Section 15(b)(11) of the Exchange Act and their Associates.
(a) No Member or Associate shall violate Sections 9(a), 9(b), or 10(b) of the Exchange Act or any applicable regulation thereunder in connection with any security futures product.
(b) In addition to the supervisory requirements contained in NFA Compliance Rule 2-9, Members must establish, maintain and enforce written procedures reasonably designed to achieve compliance with applicable securities laws, including Sections 9(a), 9(b), and 10(b) of the Exchange Act and any applicable regulation thereunder.
(c) Members who carry security futures accounts Act shall, not less than once a year, provide each security futures customer with written information regarding NFA's Background Affiliation Status Information Center (BASIC), including the web site address.
(d) In addition to complying with Registration Rules 204(a) and 210(a), each Member shall notify NFA within 10 business days after the Member knows or should know that the Member or its associated person:
(2) is the subject of a written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery in connection with security futures transactions;
(3) is named as a defendant or respondent in any proceeding brought by a self-regulatory organization in the securities or insurance industry in connection with security futures transactions;
(4) is a defendant or respondent in any civil litigation or arbitration proceeding or is subject to any other claim for damages involving security futures transactions that has been disposed of by judgment, award, or settlement for an amount exceeding $15,000 if the claim is against an associated person or $25,000 if the claim is against the Member;
(5) is associated in any business or financial activity involving security futures products with any person who is subject to a statutory disqualification under either Section 8a of the Commodity Exchange Act or Section 15(b)(4) of the Exchange Act; or
(6) is the subject of a disciplinary action taken by the Member for activities involving security futures products if it results in suspension, termination, the withholding of commissions or imposition of fines in excess of $2,500, or any significant limitation on the Associate's activities on a temporary or permanent basis.
(e) In addition to complying with Registration Rules 206(a) and 210(b), each Associate shall promptly notify its sponsor of:
(2) the existance of any of the circumstances listed in section (d) of this rule.
(f) Each Member shall file a quarterly report with NFA containing statistical and summary information regarding written customer complaints involving security futures products. The report must be filed with NFA, in the form NFA requires, by the 15th day of the month following the calendar quarter in which the complaints are received. A Member is not required to file a quarterly report for any quarter in which no complaints were received.