Interpretive Notices

9033 - NFA COMPLIANCE RULE 2-29: DECEPTIVE ADVERTISING

(Board of Directors, June 4, 1996; revised January 1, 2020)

INTERPRETIVE NOTICE

NFA Compliance Rule 2-29 governs the use of promotional material and communications between FCM, IB, CPO and CTA Members and the public. The rule prohibits the use of misleading, deceptive or high-pressure promotional material. The purpose of this rule is to protect the public from fraudulent advertising and sales solicitations and to provide Members with specific guidance on the standards by which their promotional material and sales solicitations will be judged.

This Interpretive Notice provides guidance that will help FCM, IB, CPO and CTA Members identify and refrain from using practices that violate the letter or the spirit of NFA Compliance Rule 2-29. One common theme of deceptive or misleading promotional material is the suggestion of a strong likelihood of reaping dramatic profits by investing with the Member firm when, in fact, nothing in the Member's past experience provides any basis for those claims. Below are examples of conduct that may be deemed deceptive or misleading:

• Claims Regarding Seasonal Trades and Historical Price Moves – Members have suggested almost certain profits from so-called seasonal trades in, among other things, heating oil and unleaded gas. These promotional materials cite historical data supposedly showing that certain trades produce dramatic profits year in and year out. Another theme is the reference to historic price moves in particular commodities with a suggestion that the same record setting move is likely to occur once again. For example, promotional material may refer to a time when a particular commodity traded at a high price, suggest that a similar movement is imminent and project that a customer can expect to double, triple or quadruple their investments in a short period of time. Promotional material can also be deceptive or misleading if the "historical data" involves different products, different time frames or different fee structures. One telling point is that the types of profits touted have not been achieved by the Member or its customers.
• Cherry Picked Trades – Members have sought to entice prospective investors by claiming that their customers have made dramatic profits. However, when asked to support these claims, the Members rely on a few isolated trades. What these Members fail to disclose is that those profitable trades are not at all representative of the overall performance of either that customer's account or its other customers. In some cases, the customer referred to in the promotional material has actually lost money overall.
• Profit Projections – Members have claimed that, based on current market conditions, customers can "turn $10,000 into $40,000," or profits of a similar magnitude. Again, however, the Member has not achieved the projected profits for its customers in the past. A variation of this technique involves highlighting the tremendous profits that will result from projected price movements that are characterized, directly or indirectly, as conservative estimates when, in fact, such price movements would be dramatic.
• Use of Mathematical Leverage Examples – Members have improperly used leverage examples as a means of suggesting that prospective customers are likely to earn large profits trading in commodity interests despite the fact that the past performance of the Members' customers does not support their claims.
• Use of Price Moves in One Product to Solicit Investment for a Different Product – Members have referred to historical price data for different products than those that are being offered, sold or traded by the Members. For example, Members soliciting for options may present price data relating to the cash or futures market instead of pricing data related to the options.
• Use of Arbitrary Leverage Level – Members have presented performance results for a trading program that have been adjusted using an arbitrary leverage factor (e.g., depicting returns that are based on a partially funded investment). Some Members have claimed that the presentation is being made to illustrate the effects that partial funding could have on a trading program's performance; however, the particular trading program is not available to customers using the leverage or partial funding level depicted in the promotional material. In some examples, the promotional material also fails to provide the customer with the performance of the Member's actual trading program, which would typically show a materially different rate of return. In addition, the presentation does not adequately, if at all, explain the manner in which the rates of returns were calculated.
• Use of Third-Party Index Performance – Members have used the performance of a third-party index as a way to promote the benefits of managed futures. In some cases, Members have referenced or highlighted the performance of a third-party index even though it is not representative of the Member's trading program or performance results. In other cases, Members have drawn inappropriate or misleading comparisons between their trading program and a third-party index. Members have also failed to adequately disclose the basis and limitations associated with the index and/or a statement that the customer is unable to invest directly in the index.

Each of the practices described above presents a distorted and misleading view of the likelihood of customers earning dramatic profits by investing with the Member firm, and each of these practices represents a clear violation of NFA sales practice rules. FCM, IB, CPO and CTA Members may not use any promotional material or make any solicitation referencing dramatic profits that could be achieved in the future or could have been achieved in the past by trading in commodity interest contracts for a particular commodity market unless the Member can demonstrate to NFA that, based on the past performance of its customers, those claims are not misleading.

Any FCM, IB, CPO or CTA Member making the types of claims referred to above must be able to demonstrate to NFA upon request that the actual performance of its customers supports those claims. Failure to provide adequate documentation will constitute prima facie evidence that the promotional material is misleading.