Accounts and conduct: discretionary accounts, promo rules, arbitration

Not affiliated with or endorsed by NFA. Original practice questions, not real exam items.

These rules look separate, but they share one idea: the customer stays in control and is treated fairly. The firm may only trade the account the way the customer authorized, may only talk to customers honestly, and must give the customer a fair way to settle a dispute.

Who decides the trades

Every trade needs authorization

CFTC Regulation 166.2 says an FCM, introducing broker, or their associated persons may not place a trade for a customer unless, before the trade, the customer (or the person the customer designated to control the account) either:

specifically authorized it, meaning they named the precise contract and the exact amount to buy or sell, or
gave written authorization for the firm to trade the account without specific authorization.

Discretionary accounts (NFA Rule 2-8)

An account is discretionary when someone other than the customer may choose what to trade. NFA Compliance Rule 2-8 sets the conditions:

(a) Written authorization. No Member or Associate may exercise discretion unless the customer authorized it in writing, by power of attorney or another instrument. Discretion over only the time and price of an order does not need this.
(b) Supervisory review. The firm must have written procedures for a partner, officer, director, branch manager, or supervisory employee to review discretionary trading regularly. The reviewer may not be the person exercising the discretion.
(c) Experience. An FCM or IB may not let an Associate exercise discretion unless the Associate has been continuously registered for at least two years. CTAs are exempt, and NFA may waive it for equivalent experience.
(d) Third-party controllers. Before taking orders from an outside person who controls a customer’s account, the firm needs the written trading authorization or the customer’s acknowledgment.
(e) Family exception. Sections (b), (c), and (d) do not apply when the account owner and the person with discretion are family (such as a spouse, parent, child, sibling, grandparent, grandchild, or in-law). Section (a), the written authorization, still applies.

Made-up example: a customer phones and says “buy 2 March corn, but you pick the moment and the price.” The customer chose the contract and the quantity, so this is time and price discretion only, and no written power of attorney is needed. If the customer instead said “buy whatever grain looks good,” that is real discretion, and it needs written authorization first.

What the firm may say (NFA Rule 2-29)

Rule 2-29 governs communication with the public and promotional material: any communication for publication (such as an ad), standardized letters, reports and electronic messages, and the text of standardized sales talks.

Never allowed, in any communication: fraud or deceit, a high-pressure approach, or any statement that futures trading is appropriate for all persons.

In promotional material:

Any mention of the possibility of profit must come with an equally prominent discussion of the risk of loss.
Any mention of actual past profits must say that past results are not necessarily indicative of future results.
Testimonials must be representative, must prominently say they are not indicative of future performance or success, and must say if the person was paid.
Opinions must be clearly identifiable as opinions and have a reasonable basis in fact.
Hypothetical (simulated) results need NFA’s prescribed disclaimer, which warns that hypothetical and actual results often differ sharply.

Process:

Approval: an officer, general partner, sole proprietor, branch office manager, or other supervisory employee other than the person who prepared it approves the material in writing before first use.
Records: keep copies and the approval record for the periods in CFTC Regulation 1.31, counted from the date of last use.
Audio and video: if it makes a specific trading recommendation or describes past or achievable profits, it goes to NFA’s Promotional Material Review Team at least 10 days before first use.

Made-up example: a firm’s ad says “Our clients made 40 percent last year!” in large type, with one small line about risk at the bottom. That fails 2-29: the risk discussion is not equally prominent, and the ad must also say past results are not necessarily indicative of future results.

When there is a dispute (NFA arbitration)

NFA runs an arbitration forum under its Code of Arbitration.

Customer’s choice. When a customer seeks arbitration against a Member (an FCM, IB, CPO, CTA and similar) over futures, the dispute must be arbitrated under the Code (Section 2).
Pre-dispute agreements. A firm may ask a customer to agree in advance to arbitrate, but under CFTC Regulation 166.5 signing must not be a condition of using the firm’s services, and the customer must separately sign the arbitration clause. The agreement may not take away the customer’s right to seek CFTC reparations. NFA’s Code (Section 3) makes a non-complying agreement unenforceable.
Time limit. The claim or a notice of intent to arbitrate must reach NFA within two years of when the customer knew or should have known of the problem (Section 5).
Panel size. One arbitrator for claims of $150,000 or less, three above that. (For claims over $50,000 up to $150,000, NFA appoints three if all parties ask in writing in time, or if the sole arbitrator asks.) If a customer so requests in a timely filed pleading, the Chairperson and at least one other arbitrator (or the sole arbitrator on a one-person Panel) must not be connected with an NFA Member or NFA (Section 4(a)).
Final award. The award is final, and there is no right of appeal. A Member that does not pay within 30 days can be summarily suspended (Section 10).

Key ideas

Every trade needs the customer’s authorization: specific (exact contract and quantity) or written discretionary authority.
Rule 2-8: written authorization for discretion (time and price excepted), review by someone other than the trader, two years of registration for the AP, family exception for (b), (c), and (d).
Rule 2-29: no fraud, no high pressure, never “suitable for all”; profit claims need equally prominent risk; written supervisory approval before first use.
NFA arbitration: mandatory for the Member when the customer chooses it; never a condition of opening an account; file within two years; awards are final.