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(additions are underscored)
COMMISSIONS, FEES AND OTHER CHARGES
National Futures Association ("NFA") Compliance Rule 2-4 provides that Members and Associates shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of their commodity futures business. NFA Compliance Rule 2-36(c) similarly provides that Forex Dealer Members and their Associates shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of their forex business. Over the years, NFA's Board of Directors ("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.
For example, 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. Typically, 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 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.
The Board has also previously recognized, however, that any fee arrangement which is intended to or is likely to deceive customers is a violation of NFA Requirements (e.g., NFA Compliance Rules 2-2 and 2-29(a)) and will subject the Member to disciplinary action. Over the years, NFA's Business Conduct Committee ("BCC") has charged several Members and their Associates with violating NFA sales practice 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. 1
The Board believes that it is appropriate at this time to provide guidance on the types of sales practices specifically relating to commissions, fees and other charges that have been found to be deceptive and misleading, and violate commercial honor and just and equitable principles of trade.2 Therefore, the following are relevant factors regarding commissions, fees and other charges in determining 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:
- 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 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 these commissions and fees have on the likelihood of profit.
- If the Member or Associate solicits retail customers to engage in forex transactions 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, mark-ups and other charges have on the likelihood of profit.
- 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. For example, a few Members have used large spread positions, butterfly spreads or deep out-of-the money options in an apparent scheme to maximize commissions, without regard to the customers' best interests.
1 See, e.g., In re Qualified Leverage Providers, Inc., NFA Case No. 05-BCC-003; In re Calvary Financial Group LLC, NFA Case No. 02-BCC-005; In re The Siegel Trading Co., Inc., NFA Case No. 97-BCC-007; In re Bachus & Stratton Commodities, Inc., NFA Case No. 92-BCC-015 aff'd, NFA Case No. 93-APP-002; and In re Churchill Group, Inc., NFA Case No. 90-BCC-012.
2 This Notice does not apply to security futures products, which are governed by NFA Compliance Rule 2-37(g) and its Interpretive Notice relating to fair commissions. See NFA Manual paragraph 9047.