Navigating Electronic Marketing Rules
Nissen, Wesley G., Futures (Cedar Falls, IA)
To keep up with the competition today, CTAs, CPOs and hedge fund managers could look to the Internet for their marketing needs. But with Web regulations seemingly changing every day, the improper use of a Web site could put you in some hot water.
Using the Internet to conduct business relating to commodity trading advice raises several legal issues -- a particular challenge because the law in this area is in flux. Part of the problem is innovation typically outpaces regulation, which especially holds true for the marketing activities of commodity trading advisors (CTA), commodity pool operators (CPO) and hedge fund managers who wish to join the "e-commerce" revolution. The regulatory lag forces authorities to apply rules developed for a "paper and ink" environment to an entirely different manner of communication. Sometimes analogies between the paper and ink environment and the e-commerce environment are close enough to make these existing regulations appropriate. But often, rules or interpretations must evolve to address the unique aspects of Internet-based communication.
To date, regulators have attempted to relate Internet-based business and communication to non-Internet-based equivalents to salvage the applicability of existing regulation. But such an approach leaves many subtle issues unanswered. Recently, however, the Commodity Futures Trading Commission (CFTC) adopted certain registration rules that provide some clarification for a class of industry participants providing commodity advice over the Internet. As the use of the Internet by CTAs, CPOs and fund managers becomes even more wide-spread, more regulatory changes are likely.
The CFTC traditionally has held that anyone posting certain information on a Web site (performance history, biographical information, a discussion of trends in the market, etc.) is holding himself out to the public as a CTA and is providing "commodity trading advice," as defined in the Commodity Exchange Act (CEA). Therefore, he must register as a CTA. The CFTC also typically has found that an individual posting this information with respect to commodity pools is soliciting investments in commodity pool interests and must be registered as a CPO.
The Securities and Exchange Commission (SEC) similarly has taken the position that someone who publishes a report on a Web site discussing investing in, purchasing or selling securities, would be "holding himself out" as an investment adviser (IA) and must either be registered as an IA with the SEC or the applicable states, or be exempt from registration. The SEC also has indicated that the publishing of information about a private pool on the Internet may be an impermissible "general solicitation" of interest in the pool.
CFTC issues CTAs, CPOs and fund managers are permitted to create Web sites that contain only general contact information without having to register with the CFTC. However, the CFTC has concluded that posting of any other material on the site (performance or biographical data, etc.) will be treated as solicitation material, which triggers the CFTC's disclosure document requirement. Specifically, the CEA requires CPOs and CTAs to deliver to prospective clients a disclosure document prior to any solicitation, or acceptance or receipt of funds. This requirement can be met by including a copy of the disclosure document on the same Web site, or by providing a simple, concise statement, approved by the National Futures Association (NFA), of the investment risks, together with a hyperlink to a site where a complete disclosure document or fuller explanation of the risks can be found.
At the end of this risk statement, the prospective investor would have to
acknowledge, through the click of a button or other equivalent means, that he understands the statement and wishes to continue. In addition, an acknowledgment of the receipt of the disclosure document must be completed and returned to the CTA or GPO before making any investments. …