Most National Futures Association (NFA) members will be required to comply with a broader rule regarding communications with the public and use of promotional material beginning on January 1, 2020. NFA expanded Compliance Rule 2-291 and its related Interpretive Notices2 to apply to all commodity interest (not just futures-related) activities and better reflect current technology and industry practices.
Revised Rule 2-29 will require all futures commission merchants (FCMs), commodity pool operators (CPOs), commodity trading advisors (CTAs) and some forex dealer members (FDMs) to examine and potentially update their websites, disclosure documents and marketing materials, among other communications. Although NFA clarified that the rule will not apply to swap dealers, any member that is dually registered as a swap dealer will be required to comply with Rule 2-29 with respect to its FCM activities.
I. Key Changes
Perhaps most importantly, NFA will restrict the use of hypothetical performance by CPOs operating under a Commodity Futures Trading Commission (CFTC) Rule 4.7 exemption for pools with only investors that meet the definition of qualified eligible persons (QEPs).3 Previously, Rule 2-29 provided a broad exemption for 4.7 pools from restrictions regarding the use of hypothetical performance. Beginning in January, NFA will require promotional material directed exclusively to QEPs that includes extracted performance to include a disclaimer regarding the limitations of such performance. Additionally, disclaimers will be required for QEP promotional material that contains a composite performance record showing what a multi-advisor account portfolio or pool could have achieved in the past if assets had been allocated among particular trading advisors.
NFA has also clarified that the rule will apply to email communications. Additionally, Rule 2-29 will require members to seek NFA’s approval for all audio and video promotional material that makes specific trade recommendations or discusses past for future profits.
Finally, NFA also amended Compliance Rule 2-36(g) to specify that FDMs must comply with certain provisions of Compliance Rule 2-29 and its related Interpretive Notices.
II. Additional Information
1 NFA Compliance Rule 2-29, NFA Rulebook, available at https://www.nfa.futures.org/rulebook/rules.aspx?Section=4&RuleID=RULE 2-29.
2See National Futures Association: Proposed Amendments to NFA Compliance Rule 2-29: Communications with the Public and Promotional Material, NFA Compliance Rule 2-36: Requirements for Forex Transactions, Related Interpretive Notices and other Technical Amendments to NFA Requirements, Rule Submission Letter from Carol A. Wooding to Christopher J. Kirkpatrick, pp. 47-49 (Aug. 29, 2019), available at https://www.nfa.futures.org/news/PDF/CFTC/08292019-CR-2-29-CR-2-36-Interp-Notices-Use-of-Promotional-Material.pdf:
9003 – NFA Compliance Rule 2-29: Communications with the Public and Promotional Material to clarify certain requirements set forth in the Interpretive Notice and add new provisions addressing testimonials, hypothetical results and statements of opinion;
9009 – Compliance Rule 2-29: Review of Promotional Material Prior to Its First Use to clarify that the voluntary promotional material review program is only available to FCM, IB, CPO and CTA members and to more accurately reflect current submission and review processes;
9025 – Compliance Rule 2-29: Use of Promotional Material Containing Hypothetical Performance Results to clarify the disclosure requirements (e.g., requirements related to labels, assumptions and disclaimers when using hypothetical performance);
9033 – Compliance Rule 2-29: Deceptive Advertising; and 9034 – NFA Compliance Rule 2-29: Deceptive Advertising combined into a single Interpretive Notice and updated to cover commodity interests and identify additional deceptive practice;
9037 – Compliance Rule 2-29: Supervisory Procedures for E-mail and the Use of Web Sites and 9063 – Use of On-Line Social Networking Groups to Communicate with the Public combined and updated to apply to all commodity interests and all electronic communications. Supervisory and record retention requirements are also clarified.;
9038 – Compliance Rule 2-29: High-Pressure Sales Practices to more directly address the use of electronic communications that convey an undue sense of urgency;
9039 – Compliance Rules 2-29 and 2-9: NFA's Review and Approval of Certain Radio and Television Advertisements to encompass all forms of audio or video content and more accurately reflect current technology, including Internet broadcasts and downloadable media;
9053 – Forex Transactions to align with the revisions to NFA Compliance Rule 236 and to clarify that FDMs may be held responsible for promotional materials related to third-party trading systems; prohibit FDMs and their associates from representing that a customer will have direct access to the inter-bank market; and to prohibit FDMs and their associates that are straight through processing orders from suggesting that the FDM is not the counterparty to a customer's trade;
Cross references and other conforming changes are made to 9042 (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), 9043 (NFA Compliance Rule 2-29: Use of Past or Projected Performance; Disclosing Conflicts of Interest for Security Futures Products) and 9055 (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).
4 National Futures Association: Proposed Amendments to NFA Compliance Rule 2-29: Communications with the Public and Promotional Material, NFA Compliance Rule 2-36: Requirements for Forex Transactions, Related Interpretive Notices and other Technical Amendments to NFA Requirements, Rule Submission Letter from Carol A. Wooding to Christopher J. Kirkpatrick (Aug. 29, 2019), available at https://www.nfa.futures.org/news/PDF/CFTC/08292019-CR-2-29-CR-2-36-Interp-Notices-Use-of-Promotional-Material.pdf.
5 NFA Notice to Members I-19-25 (Nov. 13, 2019), available at https://www.nfa.futures.org/news/newsNotice.asp?ArticleID=5176.