Compliance for Futures Examiner: to compare results from Futures Trading Systems

Compliance with NFA Rules

Contents
1. Introduction 2. NFA Compliance Rules 3. Member Accountability for Material on Other Websites 4. Supervisory procedures for checking a website for NFA compliance 5. Sample form for recording results of a compliance check 6. Log of Compliance-related Changes to Futures Examiner

1. Introduction

The National Futures Association (NFA) is the "premier independent provider of ... regulatory programs that safeguard the integrity of the derivatives markets". The NFA is concerned about misleading information regarding futures trading, and they provide rules to foster realism and honesty in information about futures trading, including advertising and promotional material. At Futures Examiner (FE) we strive to present results and other information about trading systems in an objective, unbiased manner, and see ourselves as sharing the goals of the NFA.

Most System-Assist Brokers are required to become Members of the NFA, and to follow NFA rules. And many system developers are Commodity Trading Advisors (CTAs) registered with the related Commodity Futures Trading Commission (CFTC) and also NFA Members.

The present "Compliance" page summarizes some relevant NFA rules; outlines some situations in which Members can be held accountable for information on other websites; and addresses Supervisory procedures that Members use to evaluate websites (such as Futures Examiner) for compliance. Please inform us of any non-compliances that you may find.

2. NFA compliance rules that may be relevant for Futures Examiner

NFA Compliance Rule 2-29: Communication with the Public and Promotional Material (¶ 5147.20, 2004-May-01). This rule is intended to "ensure that Members observe the highest ethical standards when communicating with the public and use marketing tools fairly and effectively".
Guide to NFA Compliance Rule 2-29 (PDF format, 32 pages; 2004-Jun) This document is a lengthy guide to Rule 2-29.
NFA Interpretive Notice 9025: NFA Compliance Rule 2-29: Use of performance material containing hypothetical results (revised 1996-Aug-29) This document contains additional requirements regarding the presentation of hypothetical results. (This Interpretive Notice has been attached to the newer Notice I-96-20 with minor editing changes.)
NFA Notice to Members I-96-20: Amendments to NFA Compliance Rule 2-29(c) and the Interpretive Notice relating to the use of promotional material containing hypothetical performance results (October 03, 1996). This Notice consists of (1) an Introduction; (2) an Amended version of NFA Compliance Rule 2-29(c) (which has been incorporated into the 2004 version of Rule 2-29), and (3) a copy of NFA Interpretive Notice 9025.
NFA Compliance Rule 2-9: Supervisory Procedures (¶ 5065, 2002-Apr-23) This rule states that (a) each Member shall diligently supervise their employees and agents; (b) the NFA may require Members with a poor employment history of their APs to adopt supervisory procedures for telemarketing; and (c) each FCM and IB Member shall implement a written anti-money-laundering program to comply with the Bank Secrecy Act. The requirements are general in nature and do not refer to websites, but Interpretive Notice ¶ 9037 does.
NFA Interpretive Notice 9037: NFA Compliance Rule 2-9: Supervisory Procedures for E-mail and the use of websites (¶ 9037, 1999-Aug-19). Regarding websites, this document notes that NFA Compliance Rule 2-29 establishes standards that web site content must meet, and gives requirements for supervisory procedures to ensure that these standards are met, including: (1) procedures must be in writing; (2) procedures must require prior review and approval of the web site by an appropriate supervisor; (3) reviews must be documented; and (4) each substantively new version of a web page must be reviewed. This document also addresses (5) Limited access, e.g. through acknowledgement by a user; (6) Employees' and Agents' websites; (7) Time-frame of a web page; and (8) Hyper-links.
Bylaw 1101: Doing business with non-Members: Prohibition (¶ 4239; 2001-Aug-21). This short bylaw restricts the situations in which a Member may act, on behalf of a non-member that is required to be registered as an FCM, IB, CPO, or CTA: by (1) carrying an account, accepting an order or handling a transaction in commodity futures contracts; or (2) accepting orders in commodity futures contracts to cover leverage transactions. We do not believe that this bylaw is relevant to Futures Examiner.
NFA Interpretive Notice 9055: NFA Bylaw 1101, and Compliance Rules 2-29 and 2-9: 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 (¶ 9055, 2004-Aug-19). We believe that this bylaw is not relevant to Futures Examiner, since we do not provide advice, do not direct client accounts, and do not provide information tailored to the characteristics of particular users.
Disclosure Documents: a Guide for CPOs and CTAs (March 2004) This document contains comprehensive guidelines for preparing Disclosure Documents. It appears to incorporate the requirements of CFTC Regulation 4.25 for CPOs and 4.35 for CTAs. It also has helpful additional information and examples (e.g., how to calculate ROR when there are additions and withdrawals, and VAMI, on pages 9-12). It also describes how to file documents and the review process (pages 33-34); Available Exemptions re sophisticated investors, offshore pools, and securities pools (pages 35-43); and Requests for Exemptive, No-Action, and Interpretive letters (which provide relief from specific CFTC requirements; page 44).
CFTC Regulation 4.25: Performance disclosures for Commodity Pool Operators (1998-Oct-30; PDF format, where the section numbering is easier to follow; 5 pages). This document is not directly applicable, since we report on trading systems, and not commodity pools. However, the regulation is referenced by NFA Rule 2-29, and some general principles are worth noting. Highlights from (a)(1)(i): Intro: amounts shown must be net of all costs; must report the largest (F) monthly drawdown and (G) month-end peak-to-valley drawdown in the last 5 years, and year-to-date, as a percentage of the pool's net asset value, and indicating the month and year of the drawdown. Section (a)(9) requires that the legend "PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS" precede any presentation of past performance.

3. Member Accountability for Material on Other Websites

Based on NFA Rules 2-9, 2-29, and related Interpretive Notices, Members may be accountable for material on websites which link to them, or on which they advertise. Some details are given below in Table A.

Table A: Member Accountability for Material on Other Websites
Item	Description
1. Electronic Media: Content Issues Specific to Electronic Communication: Hyperlinks (from Guide to NFA Compliance Rule 2-29, page 22).	Members can be held responsible for the contents of a hyper-linked site if (a) there is an agency relationship between the Member and the firm/site it is linked to; (b) the Member benefits, either directly or indirectly from the link; or (c) the Member has reason to know that a site it is linked to contains misleading information. [Note: we assume that this requirement applies when either (a) a Member's site links to another site; or (b) another site links to a Member's site.]
2. Websites: Agents' Websites (from Interpretive Notice 9034 for Compliance Rule 2-9, para 4: "As is...")	"The use of agents' web sites to solicit leads may subject a firm to liability if the agents' leads were generated through deceptive materials posted on a web site. If a firm (either non-Member or Member) maintains a web site which contains deceptive information regarding futures or options trading and a Member pays that firm to provide a hyperlink to the Member's web site, the Member may well be held accountable for the content of the other firm's web site."
3. Websites: Links to Other Websites (from Interpretive Notice 9034 for Compliance Rule 2-9, para 5: "The fact...")	(1) "The fact that a Member creates a hyperlink from its web site to another web site does not, in and of itself, make the Member firm accountable for the content of the other web site." (2) However, "appropriate supervisory procedures may include ... monitoring the general content of the web site to which the Member links." (3) "Members who ... use a chain of hyperlinks to a 'remote' web site may be held accountable for that 'remote' web site's content."
4. Agency Responsibility (from Interpretive Notice 9055: Guidelines relating to Third-Party Trading Systems and Developers)	(1) "An NFA member may be responsible, under NFA Compliance Rule 2-29, for misleading promotional material prepared and disseminated by a third-party trading system developer, whether or not the third-party trading system developer is an NFA Member ..., if there is an agency relationship between [them]." (2) An agency relationship may exist if "the parties have expressly or implicitly agreed that one may act for the other". (3) "If there is an agency relationship between [them], then the Member has an affirmative duty, under NFA Compliance Rule 2-9, to supervise the activities of the third-party system developer/agent."
5. Supervisory Responsibility under NFA Compliance Rule 2-9 (from Interpretive Notice 9055: Guidelines relating to Third-Party Trading Systems and Developers)	(1) "Even where no agency relationship exists, a Member whose web site links to or otherwise refers customers to a third-party system developer or has a referral agreement with a third-party trading system developer should conduct a due diligence inquiry into the system developer's advertising practices with a view towards identifying and avoiding the misleading advertising practices described earlier. (2) These "supervisory procedures [may] include periodic inquiries as to whether [Member] employees and agents are conducting due diligence with respect to the third-party system developer's web site or advertising".

4. Supervisory procedures for checking a website for NFA compliance

The NFA may require that Members have written Supervisory Procedures to monitor websites for compliance. These procedures would probably include a list of compliance-related items to check, such as the one given below in Table B. On the website being reviewed, every page should be checked. (Our Site Map provides a convenient list of pages, and can be used to link to many of them.) The results of each check should be documented, e.g. using a form such as the one given below in Table C.

After the initial check, a website should be checked again perhaps every month, and/or whenever a material change has been made. We give the Date last modified on the bottom of some pages. A Log of Compliance-related Changes for Futures Examiner is given below in Table D. Also, we will email interested parties whenever a material change has been made.

Table B: Some things to look for when checking a website for NFA compliance
Item	Description
Misleading information	Look for any material that is Misleading, Fraudulent, or Deceptive.
High Pressure, or Appropriate for all persons	Is the material high pressure? Does it say or imply that futures trading is appropriate for everyone?
Risk of Loss	Any mention of possible profit should be balanced by mention of the risk of loss.
How the systems were chosen	It should be clear how the systems being reported were chosen. E.g. selected system(s) being promoted; or all the systems from a particluar developer, or all systems for which data is available.
Actual results	"Actual" results should be (a) accompanied by a description of what they are (ref?); (b) accompanied by the NFA Actuals disclaimer; (c) clearly identified as being "actuals"; and (d) presented with at least the same prominence as hypotheticals.
Hypothetical results	"Hypothetical" results should be (a) accompanied by a description of what they are (ref?); (b) accompanied by the NFA Hypotheticals disclaimer; and (c) clearly identified as being "hypothetical". The disclaimer should be prominently displayed, in a font size at least as large as the hypothetical results. It is desirable that users must read the disclaimer and click "I understand" before hypothetical results are displayed (ref?).
Gross vs. Net results	Is it clear whether the results include slippage, commissions & fees, and cost of the system? And are the specific commission etc. allowances given?
Rate of Return	Rate of return information should be given for each month and year. (Rate of Return is defined as the net performance for a period, divided by the beginning account size.)
Drawdowns	The largest monthly loss and the largest end-of-month peak-to-valley drawdown should be presented, along with the month and year in which they occurred.
Opinions, Claims, or Recommendations	Opinions must be clearly identified as such, and have a reasonable basis in fact.
Supporting information	Supporting information should be provided on the website, or readily available to users. This would include things such as (a) account size used for percentage calculations; (b) allowance for slippage, commissions & fees, and cost of system. Values should be reasonable.
Hyper-link to your site	Does the site being evaluated link to your (the Member's) website? If so, you could be held responsible for contents of the site being evaluated. (See Table A: 1 above.)

5. Sample form for recording results of a compliance check

A sample form for recording the results of a compliance check for Futures Examiner is given below in Table C. Note that the form has fields to be dated and signed by the person who performs the check.

Table C: Form for recording results of a compliance check of FuturesExaminer.com
Page	Compliance (or Deficiencies)	Comments
1. Home
2. Gateway to Top Gainers and Smoothies
3. Top Gainers and Smoothies		Has Results (and Actuals disclaimer)
4. Intro: General, Results 1, Results 2, Results 3, Results 4
5. Gateway to Results
6. Results: Summary Results		Has Results
7. Results: Statistics		Has Results
8. Results: Monthly data		Has Results;
9. Results: Single-Chart		Has Results
10. Results: Multi-Chart		Has Results
11. Results: Component Info (for Actual component)		Has Results (and Actuals disclaimer)
12. Results: Component Info (for Hypothetical component)		Has Results (and Hypotheticals disclaimer)
13. Login pages (Login, Register, Change Password, Change Registration info, Forgot my Password, Logout
14. Trading Systems: About Trading Systems
15. Trading Systems: Systems we Track
16. Trading Systems: System Vendors
17. Trading Systems: System-Assist Brokers
18. Contracts: Types of Contracts
19. Contracts: Commodity Specifications
20. Contracts: Forex Specifications
21. Help: Basic Features and Conventions
22. Help: Overview of Pages
23. Help: Results page
24. Help: Shown Basket display
25. Help: Component Information page
26. Help: Statistics page
27. Help: Monthly Results page
28. Help: Multi-Chart page
29. Help: Single-Chart page
30. Help: FAQs (Frequently Asked Questions)
31. For Partners: Advertise
32. For Partners: Provide Data
33. For Partners: Compliance for NFA Members
34. About Us: Comments Please
35. About Us: Reported Errors
36. About Us: Mission and Policies
37. About Us: Background
38. About Us: Contact Us
39. Tours: Getting Started, Drop-Down Menus, Register & Login, View Results, Create Baskets
40. Site Map
Date:	Checked by:

6. Log of Compliance-related Changes to Futures Examiner

Table D contains a log of changes to Futures Examiner which, in our opinion, may have a significant impact on the compliance of the website. This table is intended to help interested parties to decide when to re-review parts of FE, and to highlight some of the compliance features of FE.

Table D: Log of Compliance-related Changes to FuturesExaminer.com
Date	Page(s)	Change(s)
2004-Dec-10	Home; Results pages (component and basket naming); About Trading Systems; Component Information, Help: Basic Features & Conventions, Results, Statistics, Component Information; Intro to Results (1-4)	The term "real trade" was changed to "actual trade". The ending of component and basket names was changed from "Real" to "Actual". (per comment from NFA)
2004-Dec-10	Gateway to Results page	This new gateway page was created: (1) outlining what systems we track; explaining (2) what Actual and Hypothetical results are and (3) how they are identified; (4) stating that all results contain allowances for slippage, commission & fees, and cost of system; (5) containing both the NFA Actuals and the NFA Hypotheticals disclaimers; and (6) requiring the user to click "I understand and agree..." before displaying the Results page. (per comment from NFA)
2005-Jan-11	Single-Chart, Multi-Chart	Added NFA Actuals and Hypotheticals disclaimers. (per comment from NFA)
2005-Feb-13	Gateway to Top Gainers & Smoothies page	This new gateway page was created: (1) outlining what systems we track; explaining (2) what Actual results are and (3) how they are identified; (4) stating that all Actual results contain allowances for commission & fees, and cost of system; (5) containing the NFA Actuals disclaimer; and (6) requiring the user to click "I understand and agree..." before displaying the Top Gainers & Smoothies page. (The Top Gainers & Smoothies page was password-protected until Feb-25 pending NFA review.) (per comment from NFA)
2005-Mar-01	Compliance for NFA Members	This page was created.
2005-Mar-03, 06	Systems we track, System vendors, System-assist brokers, Component information, Home	Links to system vendors and system-assist brokers were removed.
2005-Mar-10	Top Gainers and Smoothies	Introductory text added, with cautions re (a) losses, and (b) numeric results vs. equity curves. Permission given to quote ratings, provided date is included.
2005-Mar-14	Results pages: Summary Results, Monthly, Statistics	For each system, any Actual components are presented before hypothetical components. Also, the components are presented in correct alphabetic order of contract.
2005-Mar-23	Results pages: Summary Results, Monthly, Statistics	System Totals are presented automatically for multi-commodity systems. Components are presented in user-selected Sort Order (Alphabetic, System profit/loss, or Individual profit/loss).
2005-Oct-03	Basic Features & Conventions page	Section 4. Actual vs. Hypothetical Results was added, giving details, and explaining that "Actual" results, although based on actual fills, assume continuous single-contract participation, so they are hypothetical.
2005-Oct-08	Top Gainers and Smoothies page	Links were added for explanations of "Actual results" and "Net profit".
2005-Oct-08	Basic Features & Conventions page	In 5. Net Dollar Profit..., some typical commission ranges were given.
2005-Oct-20	Results pages: Summary Results, Monthly, Statistics	Current results are now presented in different baskets from out-of-date results. The new baskets are: All_Current_Actuals, All_Current_Act_&Hyp, All_OutOfDate_Actuals, and All_OutOfDate_Act_&Hyp. The previous baskets All_Results and All_Results_Actual have been removed.
2005-Oct-20	About Trading Systems page	In 2. Trading vs. Investing, it is noted that losing all the money in your trading account, or more, does happen. Section 5. Results are not compounded, has been expanded and improved. The statement that "by convention, reported results for trading systems are usually not compounded" has been removed.
2005-Oct-20	Basic Features & Conventions page	In 7. Baskets, the new *All_Current_Actuals etc. baskets are explained. In 10. Account Size, the statement that maximum drawdown is often about 2x margin is explained.
2005-Oct-20	Top Gainers and Smoothies page	In text box near bottom of page, statement that Actual results do not allow for financial risk has been better explained.

Last updated 2006-Feb-25

Caution: Commodity trading involves substantial risk of LOSS, and is not appropriate for everyone. Past performance is not necessarily indicative of future results. Do not trade with funds you can not afford to LOSE!!
Disclaimer: Information on this website is provided for educational and informational purposes only. We do not endorse or recommend any particular system(s) or broker(s). We endeavour to make the information as accurate and meaningful as possible. However, we assume no liability for the accuracy or integrity of data, charts, or other information on this website, or for any use the user may make of this data. Much of the data presented on this website is based on data obtained from other sources, and we cannot guarantee its accuracy or integrity. Errors can and will occur. If you notice any errors or other problems, please inform us as soon as possible.

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