Preparing for an NFA Audit

1
(No Transcript)
2
The NFA Examination Process Patricia Cushing,
Director, Compliance Michael Braden, Manager,
Compliance James Forst, Manager, Compliance
3
Risk-Based Exam Selection

• Commenced development of NFAs 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

4
Risk factors that may prompt an examination

• Customer complaints
• Business background of principals
• Concerns noted during a review of the firms
  promotional materials, disclosure documents
  and/or financial filings
• Referrals received from other agencies/members
• Time since registration or last exam

5
Use of PQR and PR data in Risk Analysis

• Funds under management
• Degree of leverage
• Types of investments
• Performance Returns

6
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

7
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

8
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

9
Areas of Focus and Common Deficiencies
10
Areas of Focus

• Renewed focus on Internal Controls
• Policies and Procedures
• Separation of Duties
• Access
• Backgrounds of Key personnel
• Due Diligence
• Risk Management

11
Areas of Focus

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

12
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)

13
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)

14
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

15
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

16
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

17
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
  non-customer
• Undermargined Accounts
• - Length of time accounts are undermargined while
  continuing to trade

18
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

19
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

20
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

21

• 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

22
Disclosure Documents and Performance Reporting

• Operations 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

23
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

24
(No Transcript)