NFA Sales practice rules

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The rule development process at NFA is ongoing, requiring the active participation of NFA's membership. NFA Advisory Committees work with staff to craft rules that ensure Members meet high ethical standards in their dealings with customers.

Some NFA Compliance Rules address the general issues of adhering to just and equitable principles of trade (2-4) and avoiding fraudulent behaviors (2-2). Others relate to how Members communicate with the public (2-29), how they provide disclosure to potential customers (2-30), and how they supervise their employees (2-9).

These rules are continually being interpreted and applied to specific situations by NFA's Business Conduct and Hearing Committees. The decisions made by these committees[1] and the Interpretive Notices found in NFA's Rulebook[2] are the best places to find guidance and explanations of the rules. (The notations within each rule discussion refer to the paragraph numbers assigned to the Interpretive Notices.) Because these rules are continually being interpreted and amended, the best source for up-to-the-minute information is the NFA's web site, in particular the NFA Manual/Rules, at www.nfa.futures.org

Contents

NFA Compliance Rule 2-2 (Fraudulent behaviors)

NFA Compliance Rule 2-2[3] identifies fraudulent behaviors as:

  • Cheating, defrauding or deceiving, or attempting to cheat defraud or deceive any customer
  • Bucketing a customer's order or engaging in a business that is like a bucket shop
  • Willfully making or causing to be made a false report, or record of a futures contract
  • Disseminating or causing to be disseminated false or misleading information, or a knowingly inaccurate report, that affects or tends to affect the price of any commodity that is the subject of a futures contract
  • Engaging in manipulative acts or practices regarding the price of a futures contract
  • Willfully submitting materially false or misleading information to NFA
  • Effecting a trade on a contract market for a person who is subject to a CFTC prohibition from trading on any contract market
  • Embezzling, stealing, purloining or knowingly converting money, securities or other property received from or accruing to a customer, client or pool participant in connection with a futures contract
  • Acting in any capacity requiring registration under the Act unless the Member or Associate is registered in that capacity or exempt from registration.

NFA Compliance Rule 2-4 (Just and equitable trade principles)

NFA Compliance Rule 2-4[4] requires Members generally to abide by just and equitable principles of trade. Interpretive notices address the requirements for explaining the costs and fees associated with trading [9005] [5], the use of confidentiality language in release agreements [9014] [6], the registration requirements for NFA Members that solicit orders for security futures [9044] [7] , and the obligation to ensure best execution of customer orders for security futures products [9048] [8].

NFA Compliance Rule 2-8 (Requirements for discretionary accounts)

NFA Compliance Rule 2-8[9] spells out the requirements for discretionary accounts. An Associated Person (AP) of an FCM or an IB can not exercise discretion over a customer's account unless the AP has been continuously registered and working in that capacity for at least two years. Individuals with equivalent experience can request a waiver of this requirement from the NFA Discretionary Account Waiver Panel.

Customers have to grant discretionary authorization in writing. The FCM or IB must keep records of its discretionary accounts, regularly review the activity in these accounts and keep a written record of these reviews. And when the discretionary activity is in security futures, the review has to be conducted and documented by a registered security futures principal.

NFA Compliance Rule 2-9 (Supervision)

NFA Compliance Rule 2-9[10] requires NFA Members to diligently supervise employees and agents in every aspect of their futures business. Members are encouraged to create supervisory processes that are specific to their firm's needs. To ensure that firms review the adequacy of their supervisory procedures regularly, Members have to submit a self-examination checklist [11] to NFA on an annual basis.

In addition to Rule 2-9, there are other Compliance rules that impose more specific supervisory duties on Members. For example, Rule 2-8 contains detailed requirements regarding the supervision of discretionary accounts. Rule 2-29(e) requires each Member to adopt and enforce written procedures regarding communications with the public, including advance review and approval of all promotional material by an appropriate supervisory person. And, Rule 2-30(h) requires each Member to adopt and enforce procedures regarding customer information and risk disclosure.

NFA has also issued an interpretive notice [9019] [12] to NFA Compliance Rule 2-9 that specifically addresses the supervision of branch offices and guaranteed IBs. While Members are encouraged to tailor their supervisory procedures to their firm's particular needs, NFA expects an adequate program for supervision to include procedures for performing day-to-day monitoring and surveillance activities, conducting on-site visits of remote locations and conducting ongoing training for firm personnel. The firm’s policies and procedures, including those for the supervision of branch offices and guaranteed IBs, should be in writing and be on file with each branch office and guaranteed IB.


NFA Compliance Rule 2-13 (Disclosure by CPOs/CTAs of fees)

NFA Compliance Rule 2-13[13] requires that each Member CPO that delivers a Disclosure Document include in the document a break-even analysis [14] that provides a tabular presentation of fees and expenses. The anaylsis has to follow the format established by NFA's board and must be accurate as of the date of the Disclosure Document.

NFA Compliance Rule 2-24 (Proficiency testing)

NFA Compliance Rule 2-24[15] addresses the requirement that no FCM, IB, CPO, CTA or LTM member of NFA can have associated with it any person who hasn't satisfied the applicable proficiency requirements enumerated in Registration Rule 401 [16].

NFA Compliance Rule 2-29 (Communications with the public)

NFA Compliance Rule 2-29[17] covers the multiple forms of communication NFA Members and Associated Persons have with the public. There is a compliance guide that explains the rule's requirements in detail. 2-29's standard is that promotional material must not be deceptive or misleading, use high-pressure sales tactics, be part of a high-pressure approach, or state or imply that futures trading is appropriate for everyone.

Promotional material is defined as:

  • Sales or educational literature distributed to the public
  • Seminar presentations and any advertising that encourages seminar attendance
  • Advertising - including newspapers, magazines, radio, television, and direct or electronic mail
  • Standardized phone solicitations, including "cold calls"
  • Newsletters, reports, etc.
  • Prepared sales scripts, whether they're actually used or just developed for training purposes
  • Internet content
  • Hotlines

Rule 2-29 requires that factual statements must be true and can be supported. Statements of opinion have to be identified as such and have a reasonable basis in fact. Any statement of the possiblity of profit has to be accompanied by an equally prominent statement of the risk of loss. If testimonials are used, they must be representative of all reasonably comparable accounts, and clearly state that they are not indicative of future performance. Paid testimonials have to be identified. Hypothetical trading results can not be used if a particular program has at least three months of actual client or proprietary results. When hypothetical or simulated trading results are used, they have to be accompanied by "prescribed" language. They also have to include comparable information about the past performance of all customer accounts directed by the NFA Member over the past five years. If the Member has less than a year's experience directing customer accounts, past performance of the Member's proprietary trading for the past five years has to be included. If actual past trading profits are presented, they must be accompanied by this statement: Past results are not necessarily indicative of future results. Past performance rate of return figures have to be calculated in a prescribed fashion and be representative of the actual performance of all reasonably comparable accounts. In addition to these provisions, if Members use promotional material for security futures products there is an additional disclosure statement that must be used. And material designed to reach a public audience via the mass media has to be submitted to NFA for review at least 10 days prior to its first use. NFA Members must have written supervisory procedures in place to cover how their APs and employees use promotional material. Supervisors are required to review and approve any promotional material before its use, document their review and keep records for at least three years from the material's last use. The review of securities futures promotional material must be done by a registered securities futures principal.

NFA Compliance Rule 2-30 (Suitability)

NFA Compliance Rule 2-30[18] is the futures industry's suitability rule

NFA Compliance Rule 2-34 (Performance reporting)

NFA Compliance Rule 2-34[19] performance reporting

NFA Compliance Rule 2-36 (Forex trading)

NFA Compliance Rule 2-36[20] forex trading

References

  1. ↑ Regulatory Actions. National Futures Association. Retrieved on November 23,2007.
  2. ↑ Interpretive Notices. National Futures Association. Retrieved on November 23,2007.
  3. ↑ Compliance Rule 2-2 Fraud and Related Matters. National Futures Association. Retrieved on December 13, 2007.
  4. ↑ Compliance Rule 2-4 Just and Equitable Principles of Trade. National Futures Association. Retrieved on December 13, 2007.
  5. ↑ Interpretive Notice. National Futures Association. Retrieved on January 8, 2008.
  6. ↑ Interpretive Notice. National Futures Association. Retrieved on January 8, 2008.
  7. ↑ Interpretive Notice. National Futures Association. Retrieved on January 8, 2008.
  8. ↑ Interpretive Notice. National Futures Association. Retrieved on January 8, 2008.
  9. ↑ Compliance Rule 2-8 Discretionary Accounts. National Futures Association. Retrieved on December 13, 2007.
  10. ↑ Compliance Rule 2-9 Supervision. National Futures Association. Retrieved on December 13, 2007.
  11. ↑ Self-Examination Checklist. National Futures Association. Retrieved on January 8, 2008.
  12. ↑ Interpretive Notice. National Futures Association. Retrieved on January 8, 2008.
  13. ↑ Compliance Rule 2-13 CPO/CTA Regulations. National Futures Association. Retrieved on December 13, 2007.
  14. ↑ Intrepetive Notice. National Futures Association. Retrieved on January 10, 2008.
  15. ↑ Compliance Rule 2-24 Qualifications Testing for Associated Persons of FCMs. National Futures Association. Retrieved on January 10, 2008.
  16. ↑ Registration Rule 401. National Futures Association. Retrieved on January 10, 2998.
  17. ↑ Compliance Rule 2-29 Communications with the Public and Promotional Material. National Futures Association. Retrieved on December 13, 2007.
  18. ↑ Compliance Rule 2-30 Customer Information and Risk Disclosure. National Futures Association. Retrieved on December 13, 2007.
  19. ↑ Compliance Rule 2-34 CTA Performance Reporting and Disclosures. National Futures Association. Retrieved on December 13, 2007.
  20. ↑ Compliance Rule 2-36 Requirements for Forex Transactions. National Futures Association. Retrieved on December 13, 2007.
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