Transcript Preparing for an NFA Audit

Session 5:
The NFA Audit Process
Moderator: Regina Thoele, NFA
Panelists:
Larry Block, Kenmar Group
Joseph Picone, NFA
Lennox Compass, NFA
Risk-Based Audit Selection
• Concerns noted during a review of the firm’s
promotional materials, disclosure documents
and/or financial statements
• Funds under management or degree of
leverage
• Customer complaints
• Referrals NFA receives from other agencies
• Time since registration or last audit
How to Prepare for an NFA Audit
Self-Examination Checklist
• First step toward a successful NFA audit
• General operations checklist
• Supplemental checklists for FCMs, IBs, CPOs
and CTAs
• Signed attestation required
• If you have questions, contact NFA at (800)
621-3570
Other Available Resources
• Publication: NFA Regulatory Requirements for
FCMs, IBs, CPOs and CTAs
• NFA Podcast (10 minutes) and Web Seminar
(one hour): “Preparing for an NFA Audit”
• NFA Podcast (10 minutes): “Registration
Issues – Principals, APs and Branch Offices
• Appendices to Self-Exam Checklist: AML,
ethics training, privacy policy, disaster recovery
NFA Audit Process
• Pre-exam
– Planning Interview
– Initial Record Request
• Fieldwork
– Opening and Exit Interviews
– Document Review/Testing
– Additional Record Requests
• Completion of Audit
– Report
– Corrective Action
Areas of Focus
Areas of Focus
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Registration of APs, Principals, Other Firms
Promotional Material
Disclosure and Performance Reporting
Account Opening
Trading
Bunched Orders
Supervision
Handling of Pool Funds
Financial Reporting
CPO Audits: New Areas of Focus
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Valuation Policies
- Reasonableness
- Conflicts of Interest
- Disclosure
- Exception Reports
- FAS 157 Hierarchy
CPO Audits: New Areas of Focus
• Side Letters/Preferred Redemptions
- Compliance with Lock-Up or Gate
Provisions
- Disclosure
- Just and Equitable Principles
CPO Audits: New Areas of Focus
• Side Pocket Investments
- Reasonableness of the Classification
- Valuation
• Strategy Promotion
- Due Diligence Process
- Multi-Advisor
- Fund-of-Funds
Common Audit
Deficiencies
Registration
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Unlisted principals
Unregistered Associated Persons
Failing to update registration records
Bylaw 1101
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?
Bylaw 1101: Where to look
• BASIC
• Part 4 Exemption Look-Up in ORS and
BASIC
• Ask firm for copy of exemption
• In all cases, document findings
Disclosure Documents
• Operations inconsistent with disclosure
– Fees
– Redemptions
– Trading Strategy
• All required performance not disclosed
• Performance capsule information inaccurate
– Number of accounts
– Total assets under management
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
Incomplete account statements
• Information only included for the individual pool
participant
• Statements must include information for the pool in
its entirety
• Statements do not properly itemize all required
information
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Additions/Withdrawals
NAV per unit
Pool Financial Reporting
Required information 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
Performance
• No supporting worksheets
• Inappropriate use of composite performance
capsules
• Details covered during Session 2
Other Items
• Distribute a privacy policy to its customers upon
establishing the relationship and on an annual basis
• Attend ethics training within the time period
established in firm’s procedures
• Review/test disaster recovery plan at least annually
• Complete Self-Exam Checklist annually
Disciplinary Actions
against CPOs and CTAs
General Pool Fraud
• Paul Greenwood and Stephen Walsh
(09-MRA-002)
• Raleigh Capital (09-MRA-006)
• M25 and M37 (09-MRA-004)
• IAG Capital Management (10-MRA-002)
Regulatory Response
• Prohibition on Pools loaning money to
the CPO or an affiliate
• Effective October 1, 2009
• Pre-existing Loans
Pending Matters
• CTA Performance
– Unreported accounts
– Overstated Rates of Return
• Misappropriation of Pool Funds
– False information to NFA
– Comingling pool funds
– Inadequate disclosure
Session 5:
The NFA Audit Process
Panelists:
Roxanne Bennett, Price Asset Management
Jennifer Sunu, NFA
Matt Pendell, NFA