The nfa examination process patricia cushing director compliance
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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

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The NFA Examination Process Patricia Cushing, Director, Compliance

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The nfa examination process patricia cushing director compliance

The NFA Examination Process

Patricia Cushing, Director, Compliance

Michael Braden, Manager, Compliance

James Forst, Manager, Compliance


The nfa examination process patricia cushing director 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


The nfa examination process patricia cushing director compliance

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


The nfa examination process patricia cushing director compliance

Use of PQR and PR data in Risk Analysis

  • Funds under management

  • Degree of leverage

  • Types of investments

  • Performance Returns


The nfa examination process patricia cushing director compliance

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


The nfa examination process patricia cushing director compliance

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


The nfa examination process patricia cushing director compliance

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


The nfa examination process patricia cushing director compliance

Areas of Focus

and Common Deficiencies


The nfa examination process patricia cushing director compliance

Areas of Focus

  • Renewed focus on Internal Controls

    • Policies and Procedures

    • Separation of Duties

    • Access

    • Backgrounds of Key personnel

    • Due Diligence

    • Risk Management


The nfa examination process patricia cushing director compliance

Areas of Focus

  • Registration of APs and Principals

  • Promotional Material

  • Account Opening

  • Trading

  • Bunched Orders

  • Supervision


The nfa examination process patricia cushing director compliance

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

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

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

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

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

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


Bunched orders

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


The nfa examination process patricia cushing director compliance

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


The nfa examination process patricia cushing director compliance

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


The nfa examination process patricia cushing director compliance

  • 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

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


  • Identity theft prevention program

    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


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