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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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Presentation Transcript
slide2
The NFA Examination Process

Patricia Cushing, Director, Compliance

Michael Braden, Manager, Compliance

James Forst, Manager, Compliance

slide3
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
slide4
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
slide5
Use of PQR and PR data in Risk Analysis
  • Funds under management
  • Degree of leverage
  • Types of investments
  • Performance Returns
slide6
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
slide7
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
slide8
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
slide9
Areas of Focus

and Common Deficiencies

slide10
Areas of Focus
  • Renewed focus on Internal Controls
    • Policies and Procedures
    • Separation of Duties
    • Access
    • Backgrounds of Key personnel
    • Due Diligence
    • Risk Management
slide11
Areas of Focus
  • Registration of APs and Principals
  • Promotional Material
  • Account Opening
  • Trading
  • Bunched Orders
  • Supervision
slide12
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
slide19
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
slide20
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
slide21
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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