Transcript Preparing for an NFA Audit

The NFA Examination Process
Patricia Cushing, Director, Compliance
Michael Braden, Manager, Compliance
James Forst, Manager, Compliance
Risk-Based Exam Selection
• Commenced development of NFA’s Risk
Management System in 2006
• System analyzes the risk factors associated
with each firm
• Generally, NFA examines CPOs and CTAs
every 3-5 years
• More frequent exams if risk factors deem
necessary
Risk factors that may prompt an examination
• Customer complaints
• Business background of principals
• Concerns noted during a review of the firm’s
promotional materials, disclosure documents
and/or financial filings
• Referrals received from other
agencies/members
• Time since registration or last exam
Use of PQR and PR data in Risk Analysis
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Funds under management
Degree of leverage
Types of investments
Performance Returns
How to Prepare for an NFA Exam
Self-Examination Checklist
• First step toward a successful NFA exam
• General operations checklist
• Supplemental checklists for FCMs, IBs, CPOs
and CTAs
• Signed attestation required
Other Available Resources
• Publication: NFA Regulatory Requirements for
FCMs, IBs, CPOs and CTAs
• NFA Podcast (10 minutes): “Preparing for an
NFA Audit”
• NFA Podcast (10 minutes): “Registration
Issues – Principals, APs and Branch Offices
• Appendices to Self-Exam Checklist: ethics
training, privacy policy, disaster recovery
NFA Exam Process
• Pre-exam
– Planning Interview
– Initial Record Request
• “Fieldwork”
– Opening and Exit Interviews
– Document Review/Testing
– Additional Record Requests
• Completion of Exam
– Report
– Corrective Action
Areas of Focus
and Common
Deficiencies
Areas of Focus
Renewed focus on Internal Controls
• Policies and Procedures
• Separation of Duties
• Access
• Backgrounds of Key personnel
• Due Diligence
• Risk Management
Areas of Focus
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Registration of APs and Principals
Promotional Material
Account Opening
Trading
Bunched Orders
Supervision
Category-Specific Areas of Focus
CPOs and CTAs
• Disclosure and Performance Reporting
• Handling of Pool Funds
• Financial Reporting and Valuation of Assets
FCMs, FDM and IBs
• Anti-Money Laundering Procedures
• Automated Order Routing Systems
• Financial Statements (Net Capital and Seg)
Bylaw 1101: Due Diligence
• Does the account appear to require
registration?
• If not, why not (exemption, offshore)
• If yes, why and is it registered?
• Is the pool operator an NFA member?
• Annually, review exempt entities
(exemption affirmation)
Bylaw 1101: Where to look
• BASIC-Registration Status
• Part 4 Exemption Look-Up in ORS and
BASIC
• Ask client for copy of exemption
• In all cases, document findings
Areas of Focus on all Categories
Promotional Materials and Sales
Practices
– Procedures, review and approval
– Balanced presentation
Registration, common deficiencies
– Unlisted principals and branch offices;
unregistered APs; APs not terminated
– Failing to update registration records
Tape Recording Requirements – FCMs,
IBs and certain CTAs
Anti-Money Laundering Program
Applies to FCMs, FDMs and IBs
– Establish appropriate red flags
– Monitor for suspicious activity
– Provide training every 12 months
– Conduct an independent AML audit every
12 months
Other FCM, FDM and IB areas
Commissions receivable
– Can only be current for 30 days of due date
Coding of Accounts
– Non-customer accounts being coded as customer
– Only certain employee accounts need to be noncustomer
Undermargined Accounts
- Length of time accounts are undermargined while
continuing to trade
Bunched Orders
• Procedures for allocating split fills or partial
fills
• CTA must conduct a quarterly review of
accounts to ensure that bunched orders are
allocated in a non-preferential manner
Pool Financial Reporting, Valuation of
Assets and Handling of Pool Funds
Common Deficiencies: Incomplete account
statements
• Information only included for the individual pool
participant
• Statements must include information for the pool as a
whole
• Statements do not properly itemize all required
information
Pool Financial Reporting
Required information is missing beneath the oath on
each account statement:
• The name of the individual signing the account statement
• The capacity in which he or she is signing
• The name of the commodity pool operator for whom he or she is
signing
• The name of the commodity pool for which the statement is
being distributed
NFA Compliance Rule 2-45: Prohibition
on Pools loaning money to the CPO or an
affiliate
• Interpretive Notice outlines permissible
transactions
• Receivables from General Partner may
be deemed “loans” in certain
circumstances
Disclosure Documents and
Performance Reporting
Operations inconsistent with disclosure
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Fees
Redemptions
Trading Strategy
Conflicts of Interest
Banks, carrying brokers, custodians
GP and/or CTA ownership interest
Performance Recordkeeping
• Supporting Worksheets
• Partial Funding Documentation
Identity Theft Prevention
Program
CFTC Regulation 162: All FCMs, FDMs, IBs,
CPOs and CTAs must have a written program
designed to detect, prevent and mitigate identity
theft in connection with the opening of an
account and maintaining an existing account.
• Identify relevant red flags
• Detect Red Flags and respond appropriately
• Update periodically
• Train staff