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

• 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 Focusand 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• Registration of APs and Principals • Promotional Material• Account Opening• Trading• Bunched Orders • Supervision

Category-Specific Areas of FocusCPOs 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 CategoriesPromotional 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 areasCommissions 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 non-

customer

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 ReportingOperations inconsistent with disclosure

• 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 ProgramCFTC 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