Transcript Document

The NFA Examination Process
March 5, 2015
Patricia Cushing, Director, Compliance
Michael Braden, Manager, Compliance
J.P. Bruynes, Partner, Akin Gump Strauss
Hauer & Feld LLP
Risk-Based Exam Selection
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 Commenced development of NFA’s Risk Management
System in 2006
 System analyzes the risk factors associated with each firm
 Generally, NFA examines IBs, CPOs and CTAs every 3-5
years
 More frequent exams if risk factors deem necessary
Risk Factors that May Prompt an Examination
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 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
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Self-Examination Checklist
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First step toward a successful NFA exam
General operations checklist
Supplemental checklists for FCMs, IBs, CPOs and CTAs
Signed attestation required
Other Available Resources
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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
and disaster recovery
NFA Exam Process
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Pre-exam
“Fieldwork”
 Planning Interview
 Opening and Exit
 Initial Record Request
Interviews
 Document
Review/Testing
 Additional Record
Requests
Completion of Exam
 Report
 Corrective Action
Areas of Focus
and Common Deficiencies
Areas of Focus
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Renewed Focus on Internal Controls
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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
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CPOs and CTAs
FCMs, FDM and IBs
 Disclosure and Performance
 Anti-Money Laundering
Reporting
 Handling of Pool Funds
 Financial Reporting and
Valuation of Assets
Procedures
 Automated Order Routing
Systems
 Financial Statements (Net
Capital and Seg)
Bylaw 1101: Due Diligence
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 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
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 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
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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
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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 IB Areas
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Commissions Receivable
 Can only be current for 30 days
 Current Financial Books and Records
 Net capital computations are required to be prepared and maintained on a monthly
basis—requires current general ledgers and reconciliations
 Haircut Charges
 Balances held in foreign currencies are subject to a haircut charge against
capital
Bunched Orders
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 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 nonpreferential manner
Pool Financial Reporting, Valuation of Assets
and Handling of Pool Funds
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 Common Deficiencies: Incomplete Account Statements
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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
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 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
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NFA Compliance Rule 2-45
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Prohibition on Pools loaning money to the CPO or an
affiliate:
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Interpretive Notice outlines permissible transactions
Receivables from General Partner may be deemed “loans” in certain
circumstances
Disclosure Documents
and Performance Reporting
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 Operations inconsistent with disclosure
 Fees
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Redemptions
Trading strategy
Conflicts of interest
Banks, carrying brokers, custodians
GP and/or CTA ownership interest
 Performance Recordkeeping
 Supporting worksheets
 Partial funding documentation
Thank you.