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Wed, 15 Sep 2017— Amendments to Bylaw 301. An explanation of the amendments and Interpretive Notice can be found in the August 30, 2017 rule submission letter.
Wed, 15 Sep 2017— Amendments to Registration Rules. An explanation of the amendments and Interpretive Notice can be found in the August 30, 2017 rule submission letter.
Wed, 15 Sep 2017— Amendments to Compliance Rule 2-9: NFA Interpretive Notice NFA Compliance Rule 2-9: Special Supervisory Requirements for Members Registered as Broker Dealers Under Section 15(b)(11) of the Securities Exchange Act of 1934. An explanation of the amendments and Interpretive Notice can be found in the August 30, 2017 rule submission letter.
9039 - NFA COMPLIANCE RULES 2-29 AND 2-9: NFA'S REVIEW AND APPROVAL OF CERTAIN RADIO AND TELEVISION ADVERTISEMENTS(Board of Directors, March 28, 2000
NFA Compliance Rule 2-29 governs communications between NFA Members and the public. Among other things, the rule prohibits the use of promotional material which is misleading or deceptive. The purpose of this rule is to protect the public from fraudulent advertising and sales solicitations and to provide guidance to Members on the standards by which their promotional material will be evaluated.
Over the last few years, NFA's Board of Directors ("Board") has become increasing concerned with several types of misleading radio and television advertisements that a small number of Member and non-Member firms are using with greater frequency. Though these problem ads vary somewhat, their consistent theme is that customers are likely to make substantial profits by following the sponsoring firm's recommendations. These advertisements hurt both the customers naive enough to believe the claims and the reputation of the industry. Though NFA's current compliance rules provide a basis for prosecuting the Members who either sponsor such ads or reap any benefits from the ads, the Board has always felt that it is better to prevent than prosecute fraud.
To achieve this goal, the Board recently amended NFA Compliance Rule 2-29 to add a new subsection (h) to require any Member firm using or directly benefiting from a 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 to submit the advertisement to NFA's Promotional Material Review Team for its review and approval at least 10 days prior to first use. If additional information is needed, or the review cannot be completed within the 10 day period, the Member will be so notified. Obviously, NFA staff will not be able to independently verify the accuracy of every statement made in an advertisement within the 10 day review period; that responsibility remains with the Member. Therefore, 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 standards set forth herein.
At this time, the Board also wishes to reiterate that two prior Notices to Members dated June 4, 1996 (I-96-11) and September 2, 1998 (I-98-15) describe particular fraudulent techniques that a relative handful of Members use in their radio and television advertisements. NFA's Business Conduct Committee ("BCC") has not hesitated to issue a number of Complaints against Member firms utilizing the techniques mentioned in those Notices. Furthermore, after recently reviewing the particular types of radio and television advertisements forming the basis of these BCC Complaints, the Board has directed staff to be particularly vigilant in reviewing radio and television advertisements containing specific trading recommendations and/or a description of past or future profits. In fact, the Board finds the content of certain advertisements to be inherently misleading and has further directed staff to disapprove of their usage. Typically, these advertisements include one or more of the following practices, each of which is described in the prior Notices:
- Claims Regarding Seasonal Trades: These ads cite seasonal data which supposedly shows that certain trades produce dramatic profits year in and year out in such products as heating oil in the winter and unleaded gas in the summer.
- Claims Regarding Historic Price Moves - These ads refer to historic price moves in particular commodities such as sugar when it was trading at $0.66 per pound, gold at $800 per ounce and silver at $50, with a suggestion that the same record setting move is likely to occur again.
- Claims Regarding Price Movements - These ads highlight the tremendous profits which will result from projected price movements which are characterized, directly or indirectly, as conservative estimates when, in fact, such price movements would be dramatic.
- Claims Using Certain Pricing Data - These ads use price data for a product different from the one being marketed in the promotional material. Examples of these types of ads include: ads that use pricing data relative to the cash or futures markets to sell options; ads that use pricing data for at-the-money options to sell out-of-the money options; and ads that use pricing data that do not include commissions and fees comparable to those charged by the Member.
- Claims Containing Profit Projections - These ads claim that customers can turn a $10,000 investment into $25,000 or make similar types of dramatic profit projections.
- Claims Containing "Cherry Picked" Trades - These ads seek to entice prospective investors by claiming that their customers have made dramatic profits; however, such claims rely on isolated trades in specific customer accounts.
- Claims Regarding Mathematical Examples of Leverage - These ads improperly use "leverage examples" as a means of suggesting that prospective customers are likely to earn large profits trading futures and options.
It is important to note that this list of deceptive advertising techniques is not all inclusive. 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, and each of these practices represents a clear violation of NFA's sales practice rules.
Finally, one additional issue relating to advertising occurs when a Member benefits from the use of a "blind ad." Specifically, some Members attempt to evade NFA's advertising requirements by purchasing leads from non-Members that run misleading radio and television commercials basically identical to those prosecuted by NFA's BCC. These ads do not identify any particular Member firm and invite the viewer to call a toll-free number to obtain more information. The non-Member then sells the resulting leads to a Member firm, which then claims that it has no responsibility for the content of the ad. Members can not evade their supervisory responsibilities by buying leads from such firms.
NFA Compliance Rule 2-9 requires each Member to diligently supervise its employees and agents in the conduct of their commodities futures activities. The CFTC has brought cases against companies that run "blind ads" and has alleged that they are, in fact, soliciting orders and are required to be registered as IBs. In addition to a Member's responsibilities under NFA Bylaw 1101, the Board believes that Member firms have a supervisory duty to ensure, to the extent possible, that their employees and agents are not purchasing leads from non-Members required to be registered and/or using fraudulent advertising practices.
In many instances, a Member firm will have direct knowledge of the source of leads that the Member purchases. For example, the Member firm purchases leads from a provider that generates leads solely incidental to some other business purpose (e.g., a subscription list). However, in the event a Member firm does not have direct knowledge, then the Member firm has a duty to inquire as to the source of leads. Specifically, under those circumstances, a Member firm has an affirmative duty to determine if the leads were generated from a provider using any type of advertisement soliciting investments in futures, one of whose business purposes is the generation and sale of the leads. If a Member firm purchases leads from such a provider, then the Member must ensure, prior to soliciting any customer with the leads, that the lead provider submitted the advertisement to NFA for review and approval pursuant to Compliance Rule 2-29(h). If the advertisement was not approved by NFA, then the Member is not permitted to solicit any customer with the leads purchased from that provider.