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9003 - NFA COMPLIANCE RULE 2-29: COMMUNICATIONS WITH THE PUBLIC AND PROMOTIONAL MATERIAL
(Board of Directors, effective November 19, 1985; revised July 24, 2000; January 1, 2020 and April 22, 2020)
Section 17(p)(3) of the Commodity Exchange Act (7 U.S.C. §21(p)(3)) requires that the rules of a registered futures association such as NFA "establish minimum standards governing the sales practices of its members and persons associated therewith. . . ." NFA has established such minimum standards in the form of its Compliance Rules which, among other things, generally prohibit fraud and deceit and require Members and Associates to observe high standards of commercial honor and just and equitable principles of trade in the conduct of their commodity interest business. Although these rules supply the required minimum standards, they are general in nature and may not always provide specific guidance as to what particular conduct may be prohibited. Additional information related to how NFA rules apply to specific conduct may be found by reviewing disciplinary decisions issued by NFA's Business Conduct Committee and Interpretive Notices issued by NFA.
II. The Relationship of Compliance Rule 2-29 With Other NFA Rules
NFA Compliance Rule 2-29 implements specific requirements for communication with the public and promotional material related to the commodity interest business of an FCM, IB, CPO or CTA Member. However, all Members and Associates are subject to all other applicable NFA requirements, including NFA's rules related to fraudulent and deceptive practices (Compliance Rule 2-2) and just and equitable principles of trade (Compliance Rule 2-4) with respect to their communications with the public and promotional materials.
Compliance Rule 2-29 is not intended to supplant those or any other NFA Requirements but rather to augment them. Hence, literal compliance with Rule 2-29 will not preclude NFA from raising compliance issues with the content of promotional material or taking a disciplinary action if the Member or Associate violates any other NFA Requirement.
III. The Scope of Compliance Rule 2-29
The definition of "promotional material" set forth in Compliance Rule 2-29 is broad and is intended to apply to all forms of communication with the public by an FCM, IB, CPO or CTA Member or Associate without exception if the communication relates in any way to solicitation of an account, agreement or transaction in the conduct of the Member's or Associate's commodity interest business.
NFA recognizes certain specific standards that would be appropriate for communications prepared in advance of delivery to the public might be unenforceable and even inappropriate in the context of routine day-to-day contact with customers. Compliance Rule 2-29 is not intended to impede the free flow of information and advice to customers by subjecting spontaneous communication to rigorous and detailed content standards.
To address this problem, Compliance Rule 2-29 distinguishes routine day-to-day communications with customers and applies a different regulatory standard to such communications. This is accomplished by providing a definition of "promotional material" to identify the kinds of communications with the public that will be subject to specific content standards and other requirements beyond those provided in Section (a) General Prohibition. Therefore, the definition of promotional material is intended to include all kinds of promotional communications with the public, other than routine day-to-day contact with customers. It includes, for example, any kind of written, electronic or mechanically reproduced message or presentation that is directed to any member of the public. It also includes any oral presentations or statements to customers or prospective customers the substance of which is standardized, outlined or scripted in advance for delivery to such persons.
IV. Section-by-Section Analysis
Section (a) General Prohibition
This Section provides the general rule governing all communications with the public and applies to routine communication with customers. That means that routine customer contact will not violate Compliance Rule 2-29 as long as it is not fraudulent or deceptive, does not involve a high-pressure approach and does not contain any statement indicating that commodity interest trading is appropriate for all persons. NFA believes that the general prohibition should not hamper free and open communication with individual customers on a day-to-day basis. In general, a communication will not be considered fraudulent or deceptive in the absence of evidence of intentional or reckless conduct on the part of the FCM, IB, CPO or CTA Member or Associate. In certain circumstances intentional or reckless conduct may be presumed (e.g., if a Member or Associate specifically contradicts or downplays any disclosure statement required to be made by CFTC regulations or NFA rules).
Section (b) Content of Promotional Material
Deceptive or Misleading Promotional Material
This Section sets out the specific prohibitions and requirements applicable to promotional material, as defined. Subsection (1) bans material likely to deceive the public. Proof of violation of this subsection does not require proof of a specific intent to deceive. This Subsection instead places the burden on the Member to determine whether the material is likely to be deceptive in effect. Of course, to find a violation of this Subsection a Business Conduct Committee would have to find that the Member or Associate reasonably should have been able to determine that the material was likely to deceive. The fact that someone was actually deceived would not by itself be enough.
Subsection (2) also prohibits FCM, IB, CPO and CTA Members from making material misstatements or knowingly omitting any fact that makes promotional material misleading. This subsection deals with facts only. It requires that the facts which a Member or Associate chooses to include must be true and that no facts knowingly be left out which are necessary to make the facts stated not misleading. With that exception, this Subsection does not require the disclosure of facts. As with deceptive materials a Member must determine whether promotional material is likely to be misleading in effect and specific intent need not be shown to find that a Member violated these provisions by making material misstatements of fact in promotional material. However, because evaluating omissions is a much more difficult task, NFA has implemented a knowledge requirement for omissions (i.e., the person preparing or reviewing the promotional material knew the omitted fact and failed to include it). This knowledge requirement may complicate the proof necessary to establish a violation of this Subsection. However, knowledge can be inferred from a pattern of failures to include a material fact, the omission of which makes the promotional material misleading. Once knowledge is established, the decision whether the failure to include a fact makes the promotional material misleading in violation of Rule 2-29 will be made by a Business Conduct Committee under a standard of reasonableness.
Additional information related to deceptive advertising is set forth in Interpretive Notice 9033 - NFA Compliance Rule 2-29: Deceptive Advertising.
Other Content Requirements for Promotional Material Used By FCM, IB, CPO or CTA Members and Associates
Subsection (3) requires FCM, IB, CPO and CTA Members and Associates to include a discussion of risk to balance any discussion of the possibility of profit in promotional material. The requirement that the discussion of risk have equal prominence is not intended to mean that the reference to risk must be as long as the discussion of the possibility of profit or indeed to impose any unbending measure of prominence. It is intended to mean only that in the context of the particular promotional material, the discussion of the risk of loss is clearly displayed and is not downplayed or hidden.
Subsection (4) provides that any FCM, IB, CPO or CTA Member or Associate using promotional material that refers to actual past trading profits must state that past results are not necessarily indicative of future results.
If performance information is included in promotional material used by an FCM, IB, CPO or CTA Member or Associate, Compliance Rule 2-29(b)(5) provides that the Member or Associate must be able to demonstrate that the performance information is representative of the actual performance for the same time period of all reasonably comparable accounts. An FCM, IB, CPO or CTA Member or Associate could not, for example, advertise the performance of a "model" account unless that performance is representative of all reasonably comparable accounts. An FCM, IB, CPO or CTA Member or Associate may be able to exclude from "reasonably comparable accounts" those accounts that were actually traded pursuant to a different trading strategy or accounts that were traded independently of the accounts in the program for which performance is presented.
The use of performance information in promotional material is, of course, subject to all of the content standards of Compliance Rule 2-29, and compliance with Subsection (b)(5) will not excuse violations of other Subsections. If in presenting performance information for an account or group of accounts, a Member omits facts about those accounts or the differences between those accounts and the account being promoted, and the omission makes the material misleading, the use of the material violates Subsection (b)(2) even though the performance information given is accurate and is representative of all reasonably comparable accounts in compliance with (b)(5). This interaction of the requirements of Subsections (b)(2) and (b)(5) will come into play whenever a Member chooses to present performance information about an account or program which differs materially from the account or program being promoted; for example, where performance information about a house account is used, or where trading control or strategies, commission rates or account sizes which applied in the account or program for which performance is being shown differ from those which will apply in the account or program for which the customer is being solicited. Under the Rule, a Member is free to use a sales tool performance information about accounts which differ from the accounts being promoted, but must take care to ensure first, that the performance information complies with Subsection (b)(5), and second, that the differences are explained to the extent necessary to make the promotional material not misleading.
Subsection (b)(5) also provides that the rate of return must be presented net of all fees and expenses1 and must be calculated in a manner that is consistent with the applicable requirements of Part 4 of the CFTC's Regulations and NFA Compliance Rule 2-34, which define rate of return as the ratio between net performance and beginning net asset value for the period. This is not intended to require that the precise Part 4 formula be used in all cases but rather to prohibit the use of methods which lead to rates of return which are materially higher than those produced by the Part 4 method.
A CTA Member that is also an SEC Registered Investment Adviser and/or its Associate may present past performance results, including the rate of return, to an eligible contract participant (ECP) on a gross basis in a non-public, one-on-one presentation, if the CTA Member provides the ECP client with a written disclosure that the performance results are presented on a gross basis and do not reflect the deduction of fees and expenses, which will reduce the client's returns, and offers to provide the client with the performance results net of any fees and expenses agreed upon by the CTA Member and the ECP client at or prior to exercising discretion over the client's account.
Compliance Rule 2-29(b)(6) provides that any testimonial used in promotional material must be representative of all reasonably comparable accounts, prominently state that the testimonial is not indicative of future performance, and, if applicable, state that it is a paid testimonial.
Section (c) Hypothetical Results
Compliance Rule 2-29(c) establishes requirements for FCM, IB, CPO or CTA Members and Associates that utilize hypothetical performance results. Additional information related to these requirements is set forth in Interpretive Notice 9025 - Compliance Rule 2-29: Use of Promotional Material Containing Hypothetical Performance Results.
Although promotional material directed exclusively to persons who meet the standards of a Qualified Eligible Person (QEP) under CFTC Regulation 4.7 are not specifically required to comply with Compliance Rule 2-29(c)(3), the presentation of hypothetical performance results in promotional material is subject to all other NFA rules, including Compliance Rule 2-29(b)(1), which prohibits the use of misleading or deceptive promotional material. Therefore, even for promotional material directed exclusively to QEPs, if not including the past performance information required under Compliance Rule 2-29(c)(3) would make the promotional material misleading, then a Member may be subject to discipline under Compliance Rule 2-29(b)(1).
Section (d) Statements of Opinion
Under Compliance Rule 2-29(d), FCM, IB, CPO and CTA Members and Associates must clearly identify statements of opinion used in promotional material as opinions. In addition, any statement of opinion must have a reasonable basis in fact.
Section (e) Written Supervisory Procedures
Pursuant to Compliance Rule 2-29(e), FCM, IB, CPO and CTA Members must implement and enforce written supervisory procedures that are designed to achieve compliance with NFA's requirements for promotional material. In addition, all promotional material must be reviewed and approved in writing by an appropriate supervisory employee prior to first use. It should be emphasized, however, that even communications with the public which do not fall within the definition of promotional material must be diligently supervised under other existing NFA and CFTC rules.
Section (f) Recordkeeping
Compliance Rule 2-29(f) is intended to provide a way in which NFA can conduct meaningful examinations of both the content of and supervisory procedures for promotional material. In addition, this Section contains a requirement that FCM, IB, CPO and CTA Members who use hypothetical performance results be prepared to demonstrate to NFA's satisfaction the basis for such results. This means that these Members must maintain the records necessary to document how the hypothetical results were calculated.
Section (g) Filing with NFA
Compliance Rule 2-29(g) allows the Compliance Department to implement filing requirements for any FCM, IB, CPO and CTA Member. This provision is intended to allow NFA to maintain close review of promotional material in circumstances where special scrutiny is warranted.
1 Fees and expenses that are not required to participate in a trading program (e.g., non-mandatory custodial or administrative fees) need not be reflected in the performance presentation.