NFA Compliance Rule 2-29 is important right now for those commodity pool operators and commodity trading advisors who also trade in the spot forex market. If the CFTC approves a rule adjustment by the NFA (see NFA Announces New Forex Rules), such CPOs and CTAs (who are NFA members) will need to make sure that all of their activity with regard to their forex trading activities conforms to the requirements of NFA Compliance Rule 2-29.
NFA Compliance Rule 2-29 is also important because the CFTC is expected to propose rules requiring managers who trade in the Forex markets, and who are not regisitered as CPOs or CTAs, to register with the CFTC. In the event such registration rules go forward, it is likely that such Forex managers will need to follow Compliance Rule 2-29. This article details the important aspects of this rule.
Overview of NFA Compliance Rule 2-29
The rule is outlined as follows:
Part a: bans fraudulent communications with the public.
Part b: provides guidelines for what can and cannot be mentioned in marketing materials.
Part c: outlines the necessary requirements if an advisor uses hypothethical performance results, including performance resutkts….
Part d: provides that statements of opinion in promotional material must be clearly identified
Part e: provides that each firm must have written supervisory procedures for compliance with the rule; all promotional material must be reviewed and approved by an appropriate supervisor/officer
Part f: requires that promotional material (and approval under part (e)) must be maintained for a certain period of time
Part g: NFA reserves the right to require all promotional material to be submitted to the NFA prompty after its first use
Part h: no radio or TV ads are allowed unless the NFA has reviewed and approved such ads at least 10 days prior to first use
Part i: provides definitions for terms used in the rule
Part j: provides extra requirements for NFA members who are registered broker-dealers
NFA Compliance Rule 2-29(c)
This rule is especially important and I have reprinted it in its entirety below.
(c) No Member or Associate shall use any promotional material which:
(1) is likely to deceive the public;
(2) contains any material misstatement of fact or which the Member or Associate knows omits a fact if the omission makes the promotional material misleading;
(3) mentions the possibility of profit unless accompanied by an equally prominent statement of the risk of loss;
(4) includes any reference to actual past trading profits without mentioning that past results are not necessarily indicative of future results;
(5) includes any specific numerical or statistical information about the past performance of any actual accounts (including rate of return)
(i) unless such information is and can be demonstrated to NFA to be representative of the actual performance for the same time period of all reasonably comparable accounts and,
(ii) in the case of rate of return figures, unless such figures are calculated in a manner consistent with CFTC Regulation 4.25(a)(7) for commodity pools and with CFTC Regulation 4.35(a)(6), as modified by NFA Compliance Rule 2-34(a), for figures based on separate accounts, or
(6) includes a testimonial that is not representative of all reasonably comparable accounts, does not prominently state that the testimonial is not indicative of future performance or success, and does not prominently state that it is a paid testimonial (if applicable).
Please contact us if you have questions about forex registration or this rule. Other related hedge fund law articles: