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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

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 Focus

and 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 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


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 of Pool Funds

  • 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 of Pool Fundson 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 of Pool Funds

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 of Pool Funds

    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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