The Investment Club That Wants a Guarantee

Written authority plus written firm approval. Discretion over a customer account requires (a) a written power of attorney signed by the customer authorizing discretionary trading, and (b) written approval by a designated supervisor of the FCM - all before the first discretionary order. CFTC Regulation 166.2 makes both elements mandatory, and the person exercising discretion must be properly registered and associated with the firm. A verbal instruction, an email saying 'you decide,' or a good relationship does not satisfy it.

The vacation problem is not an excuse. The branch manager's absence does not suspend the requirement; another qualified designated supervisor must review and approve in writing. Trading first and getting approval in three weeks is a violation regardless of the outcome.

Entity documentation. The club is not an individual. Before the account is accepted, the firm needs documentation (partnership agreement, operating agreement, or club charter) identifying who may act for the account, and the account must be accepted by an officer or partner of the FCM. If only one member signs, the firm must confirm in writing that this member is authorized to bind the club and that the other members accept the arrangement; otherwise the firm has no enforceable recourse against them.

Possible commodity pool. Four people pooling $120,000 to trade futures is a commodity pool unless an exemption applies. Before accepting the funds, compliance must determine whether the club's organizer must register as a CPO or qualifies for an exemption. This is a threshold question - it is not something Vance can resolve himself.

No - and the request should never have been relayed as an option.

Why it is prohibited. Promising to reimburse a customer's losses is a guarantee against loss. It misrepresents the nature of futures trading - that losses are possible and are the customer's - and is a deceptive practice under the anti-fraud provisions of the Commodity Exchange Act (§4b) and NFA promotional and fair-dealing standards (Compliance Rule 2-29). It is one of the classic red flags regulators look for precisely because it induces customers to take risk they would not otherwise accept and disguises unsuitability.

Additional problems:

• A side letter is an undisclosed arrangement that contradicts the signed customer agreement, which states the customer bears the risk. Even if the firm never intended to honor it, the customer would rely on it.
• Vance has no authority to bind the firm to a reimbursement obligation. Doing so creates a personal exposure and, if the firm honored it, would amount to defrauding the firm as well.
• Relief 'beyond 10%' makes the account look like a capital-protected product; it is not one.

What to do. Decline clearly in writing, explain that losses can exceed the deposit, refuse to continue the solicitation on that basis, and escalate the request to a supervisor and compliance immediately - a customer demanding a guarantee is a suitability signal about the account. Document the refusal in the branch records.

The core defect: the claims are false and the label does not cure it.

1. 'Typical and guaranteed by the record' - the results are described as hypothetical and then described as typical. Both cannot be true. Hypothetical results are by definition not actual trading results and cannot be presented as typical of what any customer achieved. The word 'guaranteed' repeats the prohibited guarantee against loss in written form.
2. Missing required cautionary language. Hypothetical performance must be accompanied by prominent disclosure of its limitations: the results do not represent actual trading, they are the product of hindsight, they may not reflect the effect of market factors such as lack of liquidity, and no representation is made that any account will achieve similar results. Without that, the flyer is misleading even if the numbers were computed correctly.
3. No risk disclosure. A performance piece must be balanced and must state that futures trading involves risk of loss and is not suitable for everyone.
4. Unsupervised use. Promotional material must be approved in writing by a designated supervisor before it is used and must be retained under the firm's recordkeeping obligations so regulators can review it. Vance wrote it, emailed it unapproved, and is now asking for after-the-fact sign-off.

What must happen. Pull the flyer from circulation immediately; notify compliance that it was sent to at least one prospect; have a qualified supervisor (not the vacationing manager) review any corrected version; rewrite without the 'typical' and 'guaranteed' language and with the proper cautionary statement; retain the original, the distribution list, and the review records. If the FCM's or the AP's registration category requires pre-use filing of promotional material with NFA, the corrected piece must be filed and the waiting period observed before it goes out again.