By: Greg Baracy

When National Futures Association (“NFA”) member firms advertise they open themselves up to a great deal of regulatory risk. Without proper consideration, even the most innocent and well-intended efforts to promote a business can land CFTC registered firms in hot water.  On August 29th, 2019 NFA announced proposed amendments to Compliance Rules 2-29 and 2-36. Within this announcement they also updated and harmonized several well-known Interpretive Notices.  NFA’s proposed changes have now been adopted and will go into effect as of January 1, 2020. All member firms are strongly encouraged to read the entirety of NFAs rule and interpretive notice adjustments. Turnkey would like to focus on a few key adjustments that we believe could significantly impact the industry.

Audio and Visual Promotional Material

Historically only television and/or radio advertisements which made a specific trade recommendation or reference to profit potential had to be submitted to NFA for review prior to first use. Starting January 1, 2020 NFA will require ANY “Audio and Video” materials that make specific trade recommendations or profit references subject to review at least ten (10) days prior to use. In making this change NFA cited the significant expansion of media distribution platforms over the past 10 years. According to NFA, these platforms have allowed some members to avoid the intended pre-review obligation. This has also allowed firms to gain access to mass media distribution platforms in order to mislead the public.

NFA’s adjustment of the pre-review obligation to include any “Audio and Video” materials may impact a wide number of firms.  This includes groups that produce daily market commentaries using video services, audio streaming services, or other various online broadcast mediums.  The link above about NFA’s proposed amendments highlights these changes. Now more than ever it is also important for firms to refamiliarize themselves with NFA Interpretive Notice 9039.  Any CFTC registrant subject to NFA’s promotional material rules that is having difficulty in discerning whether or not current marketing behavior may be subject to NFAs new audio and video pre-review obligations should contact Turnkey for assistance.

Hypothetical Trading Results & 4.7 Exempt Firms

Another significant change NFA made relates to the use of hypothetical trading results. This also includes results which are marketed and solicited exclusively toward Qualified Eligible Participants (“QEP”) under CFTC regulation 4.7.  Exempt Commodity Trading Advisors (“CTA”) and Commodity Pool Operators (“CPO”) need to ensure they take note of this significant change.

Although promotional material directed exclusively toward QEPs is 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. Specifically, NFA cites Compliance Rule 2-29(b)(1), which prohibits the use of misleading or deceptive promotional material. NFA goes on to state that even promotional material directed exclusively to QEPs, if it does not include past performance information as required under Compliance Rule 2-29(c)(3), would be seen as misleading to NFA.

Similarly, Introducing Brokers (“IB”) and funds that utilize hypothetical allocations across multiple trading advisors in promotional materials must be careful. NFA has stated that these types of presentations can no longer be labeled “pro-forma” as it believes this term to be misleading. Even if the underlying returns of CTAs is actual, the combination of these returns in a unique portfolio with no trading history is viewed as being hypothetical. As such, any presentation of this type must conform to NFA’s applicable hypothetical presentation rules.  It is critical that firms review NFA Interpretive Notice 9025 on this topic. Registrants struggling with this adjustment to NFA obligations should also consider contacting Turnkey for assistance.

Changed Definitions

NFA has been harmonizing its rules with the Dodd Frank Wallstreet Reform Act for the last several years. As with other rules, NFA has done away with the blanket use of the word “Futures” to apply to activities under its jurisdiction. Rather, NFA is now using the term “commodity interest” to ensure that all promotional material subject to its review falls under its regulatory authority. Firms should consider this change in verbiage and adjust marketing materials and procedures accordingly.

If you would like to discuss any of the new changes with our experienced staff to help assist you in complying with your new obligations, please contact us today (312) 324-0040 or please click here today!

About the Author

Greg Baracy has over 15 years of experience in the financial services industry. His expertise spans across many verticals such as investment banking, financial advisory, quantitative and qualitative analysis. His area of focus at Turnkey is in new business origination, customer on-boarding and relationship management. Greg also regularly conducts reviews of customer outside office locations for Turnkey clients. Before joining Turnkey, he managed the Mid-Atlantic, Midwest and Northeast portfolio of municipal issuers for one of the big three Wall Street Bond Rating Agencies. During his tenure, he grew the agencies portfolio to its largest size since its inception. He holds a degree in Economics and Applied Policies from Michigan State University.