Overview
Effective May 31, National Futures Association (NFA) Swap Dealer Members (SD Members) must comply with NFA Interpretive Notice 9077 regarding the "diligent supervision" of employees and agents with respect to the swap dealer's use of marketing materials.[1]
The notice requires SD Members to maintain a supervisory program that includes:
- Policies and procedures for reviewing and approving marketing materials
- Training on the appropriate content and use of marketing materials
- Requirements for recordkeeping of marketing materials
This alert explains the notice's primary components: what is "marketing material"; the production and approval of such materials; recordkeeping obligations; and training for SD Member employees. This alert also offers suggestions on steps SD Members can take to reasonably demonstrate compliance.
Steptoe's Financial Services Group, which includes several former Commodity Futures Trading Commission (CFTC) senior officials, has decades of experience navigating the rules and practices of the CFTC and the NFA. SD Members are encouraged to contact a team member to discuss fact-specific scenarios.
What are marketing materials?
The notice defines "marketing materials" to include:
- Standardized documents in the form of pitch books, reports, letters, circulars, memoranda, presentations, publications, or brochures or similar standardized documents;
- Delivered via either hard copy or electronically, e.g., by mail, text or instant message; and
- Used for the purpose of soliciting a counterparty to enter into swap transaction(s) with the SD Member.
The use of the inclusive "and" to connect these three criteria suggests that, in order for materials to be deemed "marketing materials" (and therefore subject to the SD Member's supervision program), they must meet all three elements of the definition. SD compliance professionals should consider this criterion when determining what materials are subject to the notice.
What are research reports and are they subject to the notice?
"Research reports" are written communications (including electronic) that include analysis of the price or market for any derivative and that provide information reasonably sufficient upon which to base a decision to enter into a derivatives transaction.[2]
The term "research report" does not include:
- Communications distributed to fewer than 15 persons
- Commentaries on economic, political, or market conditions
- Statistical summaries of multiple companies' financial data, including listings of current ratings
- Periodic reports or other communications prepared for investment company shareholders or commodity pool participants that discuss individual derivatives positions in the context of a fund's past performance or the basis for previously-made discretionary decisions
- Any communications generated by an employee of the business trading unit that is conveyed as a solicitation for entering into a derivatives transaction, and is conspicuously identified as such
- Internal communications that are not given to current or prospective customers
Research reports are excluded from the definition of marketing materials and therefore are not subject to the requirements of the notice. SD Members should ensure their compliance programs are reasonably designed to incorporate the CFTC definition of research report and not rely on past practice or internal labels for various documents sent to counterparties.
What is the practical reach of the notice?
Taken together, the notice's scope of "marketing materials" is at times limiting and otherwise expansive.
The notice is limiting because it applies only to written documents that are delivered to a counterparty. In other words, supporting materials that are not actually sent to a counterparty appear to fall outside the notice’s scope. The notice also does not cover oral communications that solicit a counterparty to enter into swap transaction(s) with the SD Member.
On the other hand, the notice is expansive because it applies to all types of "standardized documents" including (as explained below) material that is tailored to or focused on a particular type or group of counterparties.
Moreover, although research reports generally are not considered marketing materials, a communication that falls into the list of research report exceptions –for example, a document that provides analysis of the price or market for any swap transaction and provides information reasonably sufficient upon which to base a decision to enter into a derivatives transaction, but that is distributed to ten people – may, in fact, be considered "marketing material."
How should a SD Member review marketing materials?
The notice requires that all marketing materials be reviewed for compliance with applicable NFA and CFTC requirements, including rules related to: (i) fraudulent and deceptive practices (NFA Compliance Rules 2-2 and 2-49 incorporating CFTC Regulation 23.410); (ii) fair and balanced communications (NFA Compliance Rule 2-49 incorporating CFTC Regulation 23.433); and (iii) just and equitable principles of trade (NFA Compliance Rule 2-4). SDs are already subject to these rules, and the notice requires SD Members to implement a program to ensure that all marketing materials comply with these regulations.
Notably, the notice permits SD Members to implement different deadlines and standards for the review of marketing materials that are general in nature versus materials that are tailored to or focused on a particular type or group of counterparties (e.g., counterparties interested in a specific swap product), particularly where a relationship with the counterparty already exists.
General material must be reviewed and approved prior to its first use, but then the SD Member is permitted to use the material with other counterparties in the future, unless the SD Member has reason to know that the material may not be appropriate for a particular counterparty or potential counterparty.
Tailored material should be reviewed and approved before it is provided to a new or potential new counterparty, but a SD Member may allow the review and approval to occur after the material is provided to an existing counterparty. The SD Member, in reviewing the materials for compliance with the NFA and CFTC rules above, also may consider the SD Member's relationship with a counterparty, including past discussions and materials shared about a particular swap transaction, provided it is reasonable for the SD Member to believe that the counterparty is aware of those past discussions or materials.
The notice's review and approval requirements suggest that a SD Member must not only implement policies and procedures to review and approve the marketing materials themselves, but also policies and procedures to review and approve to whom the materials are being sent. A SD Member also may wish to create categories of counterparties to whom a particular marketing material can be given. If a counterparty falls outside the approved categories, then the SD Member would likely need to approve use of the marketing material with that particular counterparty.
Who should approve marketing materials?
The notice states that someone other than the creator of the marketing material must review and approve the documents. Although the notice provides flexibility to identify appropriate personnel, including compliance staff, a desk supervisor, or a marketing department, these persons must have general knowledge of NFA and CFTC rules, and understand the requirements related to communications with counterparties and marketing materials. If compliance staff is not involved in the review and approval process, the SD Member’s policies and procedures should indicate under what circumstances it will provide the marketing materials to appropriate compliance staff within a reasonable time of it being used.
A SD Member should consider who is best situated to review and approve marketing materials, and how it will provide the compliance staff with the materials.
Importantly, an effective supervisory program will include appropriate training (see below) and require recordkeeping of all approvals of marketing materials, including the materials themselves.
Who needs to be trained on the SD Member's marketing materials program?
The notice requires training for both (1) individuals authorized to create or provide marketing materials to counterparties; and (2) individuals authorized to review and approve marketing materials. The training must cover applicable NFA and CFTC rules and discuss the SD Member's procedures for the review and approval of marketing material. The training also must include examples of marketing materials that are considered fair and balanced and not deceptive or misleading, as well as examples that would violate these requirements.
SD Members should provide trainings before an individual is permitted to create, review, and approve materials, and on a periodic basis going forward. SD Members also should provide additional training whenever there is a change in requirements, policies and procedures, or where a material area of concern is identified.
What marketing materials records must a SD Member retain?
Finally, a SD Member's supervisory program must detail recordkeeping requirements for marketing material. At a minimum, SD Members must maintain copies of all marketing materials, along with a record of the material's review and approval, for five years, as specified in CFTC Regulations 23.203(b) and 1.31.[3]
SD Members also may want to consider how to most efficiently incorporate this requirement into their current recordkeeping regimes by, for example, maintaining a centrally-located repository of approved marketing materials, as well as a log of approvals of marketing materials for future reference.
[1] Intermediary members (e.g., futures commission merchants, introducing brokers, commodity pool operators, and commodity trading advisers) are not subject to this notice, but must comply with other NFA guidance on the use and supervision of promotional materials. See, e.g., A Guide to Communications with the Public and Promotional Material for FCMs, FDMs, IBs, CPOs and CTAs (May 2020).
[2] 17 C.F.R. § 23.605(a)(9).
[3] NFA Compliance Rule 2-49 refers to CFTC Regulation 23.201(b)(4) and 23.203(b), which govern records retention, including marketing and sales materials.