September 4, 2019

NFA Proposes Amendments to Expand Applicability and Substance of Marketing Rules

Bob Zwirb Commentary by Bob Zwirb

NFA proposed amendments to clarify the applicability of certain NFA rules and interpretive notices to certain regulated entities.

According to NFA, the proposal is designed to reflect current technology and business practices, as well as to create consistent requirements concerning hypothetical performance results in certain promotional materials. Specifically, the NFA proposal would:

  • amend NFA Compliance Rule 2-29 ("Communications with the Public and Promotional Material") to (i) clarify that applicability is limited to futures commission merchant, introducing broker, CPO and CTA members ("certain NFA members"), (ii) expand the definition of "promotional material" to include all forms of communication with the public and apply it to "commodity interests" (not just futures-related products), (iii) specify that the provision concerning radio and television advertisements is applicable to certain NFA members, and (iv) require that any performance-related claims be presented net of all commissions, fees and expenses;

  • amend NFA Compliance Rule 2-36 ("Requirements for Forex Transactions, Related Interpretive Notices and Other Technical Amendments to NFA Requirements") to mandate that forex dealer members ("FDMs") and the associates of FDMs comply with certain sections of Compliance Rule 2-29;

  • modify relief to qualified eligible persons under CFTC Regulation 4.7 to enforce compliance with certain sections of NFA Compliance Rule 2-29; and

  • amend thirteen Interpretive Notices corresponding with the amendments to NFA Compliance Rules 2-29 and 2-36.

NFA invoked the "ten-day" provision of the CEA, and the proposed changes will go into effect unless the CFTC notifies NFA otherwise. NFA plans to issue a Notice to Members establishing the effective date for the proposal.

Commentary

Bob Zwirb
Bob Zwirb

Beyond the arguably technical aspects of expanding the scope of the legal entities covered by the NFA Compliance Rules, the amendments have very real substantive impact. When viewed together, NFA's requirements for promotional materials in general, and for forex dealers in particular, are comprehensive, expansive in scope, and fairly prescriptive.

It is not just the specific commands that NFA member intermediaries must be concerned with, e.g., the mandate that performance be presented net of all fees and expenses, or the one requiring that such data include suitable disclaimers describing the "limitations of such performance," but NFA members must also heed the expansive application of such rules and the broad expression of authority by NFA. NFA makes clear that the requirements in the guidance are "not intended to supplant those or any other NFA Requirements but rather to augment them" (emphasis added) and NFA cautions that "literal compliance" with such rules "will not preclude NFA from raising compliance issues with the content of promotional material or taking a disciplinary action." NFA also warns that the presentation of hypothetical performance results in promotional material "is subject to all other NFA rules," and, therefore, that even past performance information directed at qualified eligible persons, which is expressly not subject to all such requirements, could be deemed by NFA misleading if presented in a manner that is not fully compliant with such requirements. Get that?

Regulated entities should be aware that:

  • Members may also be subject to discipline for promotional material developed or maintained by third parties.

  • Promotional material includes even a "blog discussing commodity interests."

  • Any statement of opinion must have a "reasonable basis in fact."

  • In certain circumstances, intentional or reckless conduct "may be presumed."

In addition, NFA members must be careful in how they present performance information for partially funded vehicles, for others with varying amounts of leverage, and still others where more than one investment strategy is used. Overriding all this is the need to "implement written supervisory procedures . . . that are designed to achieve compliance with the requirements of NFA rules." In other words, this is not an area where informal procedures will do from a compliance standpoint.

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