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(additions are underscored and deletions are
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FOREX TRANSACTIONS WITH FDMS
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B. COMPLIANCE RULE 2-36
3. Supervision - Members and their Associates having supervisory responsibility must diligently supervise the member's forex business, including the activities of the Member's Associates and agents. Members must establish, maintain, and enforce written supervisory procedures.
NFA has provided members with guidance on minimum standards of supervision through interpretive notices issued under NFA Compliance Rule 2-9.8 In these interpretive notices NFA recognized that, given the differences in size of and complexity of the operations of NFA Members, there must be some degree of flexibility in determining what constitutes "diligent supervision" for each firm. This principle also applies to the supervision of a Member's forex business.
5. Communications with the Public and Promotional Material - No Member or Associate shall make any communication with potential or current retail customers that operates as a fraud or deceit; uses a high-pressure approach; or implies that forex transactions are appropriate for all persons.
Promotional material used by the Member or Associate shall not:
Include any reference to actual past trading profits without mentioning that past results are not necessarily indicative of future results;
No Member or Associate may represent that forex funds deposited with a FDM are given special protection under the bankruptcy laws.
No Member or Associate may represent that its services are commission free without prominently disclosing how it is compensated in near proximity to that representation.
No Member or Associate may represent that it offers trading with "no-slippage" or that it guarantees the price at which a transaction will be executed or filled, unless:
- It can demonstrate that all orders for all customers have been executed and fulfilled at the price initially quoted on the trading platform when the order was placed12; and
- No authority exists, pursuant to a contract, agreement, or otherwise, to adjust customer accounts in a manner that would have the direct or indirect effect of changing the price at which an order was executed.13
No Member shall use or directly benefit from any radio or television advertisement that recommends specific forex transactions or describes the extent of any profit obtained in the past or that can be obtained 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 its first use or such shorter period as NFA may allow.14
Every Member should adopt and enforce written procedures to supervise communications with potential and current retail customers and promotional material. A supervisory employee should review and approve all promotional material.
All promotional material should be maintained by each Member and be available for examination for the periods specified in the recordkeeping section of this notice, measured from the date of last use.
NFA may require any Member for any specified period to file copies of all promotional material with NFA promptly after its first use.
7. Doing Business with Non-Members - FDMs are subject to discipline for the activities of most non-members who solicit or introduce retail forex customers to the FDM or manage accounts for those customers.
The FDM is not subject to discipline for the actions of non-Members who are described in NFA Bylaw 306(b). It is also not subject to discipline for the actions of non-Members who would be exempt from Commission registration if they were acting in the same capacity in connection with exchange-traded futures contracts, such as foreign persons that solicit, introduce, or manage accounts for foreign customers only.
8. Affiliates - FDMs must supervise and are subject to discipline for the activities of affiliates that are authorized to engage in forex transactions solely by virtue of their affiliation with a FDM.
The CEA authorizes affiliates of FCMs to act as counterparties to forex transactions with retail customers if the affiliate directly or indirectly controls, is controlled by, or is under common control with the FCM and the FCM makes and keeps records regarding the financial activities of the affiliate for purposes of the Commission's risk assessment requirements.
1317 If a FDM has one or more affiliates that act as counterparty to retail forex customers solely on the basis of that affiliation, the FDM must supervise the affiliate's retail forex activities and is subject to discipline for that affiliate's activities. 1418 The FDM must also make these affiliates' books and records available to NFA upon request.
9. BASIC Disclosure - Members must provide retail forex customer with information on NFA's BASIC system.
NFA Compliance Rule 2-36(g) requires FDMs to provide customers with written information regarding NFA's Background Affiliation Status Information Center (BASIC), including the web site address.
1519 This information must be provided when the customer first opens an account and at least once a year thereafter.
5. Financial Requirements Section 12
This requirement does not apply to any FDM that consistently maintains adjusted net capital equal to or in excess of two times the greater of the amount required by Section 11(i) or (ii) of the Financial Requirements. A FDM claiming the exemption must file advance written notice with NFA. If a firm that claims the exemption falls below double its capital requirement under Section 11(i) and (ii), it must immediately notify NFA. If the firm does not come back into compliance within 48 hours, it must collect the required security deposits on all customer positions and may
not claim the exemption for six months. A firm that claims the exemption but falls below the required capital amount three times within 90 days may not claim the exemption for six months.
8 See, for example, Compliance Rule 2-9: Supervision of Branch Offices and Guaranteed IBs, NFA Manual paragraph 9019; Compliance Rule 2-9: Supervisory Procedures for E-Mail and the Use of Web Sites, NFA Manual paragraph 9037; Compliance Rule 2-9: Supervision of the Use of Automated Order-Routing Systems, NFA Manual paragraph 9046. These interpretive notices do not directly apply to off-exchange retail forex activities, but
they may provide helpful guidance to Members in connection with those activities the principles included in these notices are equally applicable to those activities.
11 Through Interpretive notices issued under NFA Compliance Rule 2-29, NFA has provided Members with guidance on what activities are deceptive and misleading. See, for example, NFA Compliance Rule 2-29: Deceptive advertising, NFA Manual paragraph 9033; NFA Compliance Rule 2-29: Deceptive Advertising, NFA Manual paragraph 9034; Compliance Rule 2-29: High Pressure Sales Tactics, NFA Manual paragraph 9038; and NFA Compliance Rules 2-29 and 2-9: NFA's Review and Approval of Certain Radio and television Advertisements, NFA Manual paragraph 9039. Although these interpretive notices do not directly apply to off-exchange retail forex activities, the principles included in them with regard to what is deceptive or misleading are equally applicable to those activities.
12 The FDM is not required to give the customer a price that is no longer reflected on the platform at the time the order reaches it. The FDM is not responsible for transmission delays outside its control. If an FDM, however, advertises "no-slippage" or that it guarantees fill prices, it must prominently disclose that transmission delays might result in customer orders being executed at a price other than that seen by the customer.
13 This includes force majeure provisions.
14 Submission of promotional materials for NFA review is not a substitute for a Member's own responsibility to review promotional material. NFA staff will not independently verify the accuracy of statements made in an advertisement; that responsibility remains with the Member. Submitting promotional material to NFA will not provide a "safe harbor" from NFA actions for Members if misstatements or omissions of material fact are discovered subsequently or NFA otherwise later determines that the material is in violation of any applicable standards.
11 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.
12 For this purpose, foreign persons and foreign customers are 1) natural persons who are not residents of the United States or 2) legal entities that are organized under the laws of a country other than the United States, do not have their principal place of business in the United States, and do not conduct their retail forex activities from a location in the United States. "United States" includes U.S. territories and possessions.
13 See Sections 2(c)(2)(B)(ii)(III) and 4f(c)(2)(B) of the CEA and CFTC Regulations 1.14 and 1.15.
14 Obviously, the FDM must also ensure that no entity with common ownership engages in the retail forex business unless it is authorized to do so.
15 FDMs can comply with this requirement by providing customers with a copy of NFA's brochure entitled "Background Affiliation Status Information Center (BASIC): An Information Resource for the Investing Public," which is available in print and on NFA's website at www.nfa.futures.org.
16 For this purpose, underages within the same U.S. calendar day are one occurrence.