The NFA Examination ProcessMarch 18 and 19, 2015

Patricia Cushing, Director, ComplianceMichael Braden, Manager, ComplianceJacob Preiserowicz, Special Counsel, Schulte Roth & Zabel

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 IBs, CPOs and CTAs every 3-5

years More frequent exams if risk factors deem necessary

2

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

3

Use of PQR and PR Data in Risk Analysis

Funds under management Degree of leverage Types of investments Performance Returns

4

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

5

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

and disaster recovery

6

Pre-exam

Planning Interview Initial Record Request

Opening and Exit Interviews

Document Review/Testing

Additional Record Requests

NFA Exam Process

“Fieldwork”

7

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

9

Areas of Focus

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

10

CPOs and CTAs

Disclosure and Performance Reporting

Handling of Pool Funds Financial Reporting and

Valuation of Assets

Anti-Money Laundering Procedures

Automated Order Routing Systems

Financial Statements (Net Capital and Seg)

Category-Specific Areas of Focus

FCMs, FDM and IBs

11

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: Due Diligence12

BASIC-Registration Status Part 4 Exemption Look-Up in ORS and BASIC Ask client for copy of exemption In all cases, document findings

Bylaw 1101: Where to Look13

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

Areas of Focus on All Categories14

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

Bunched Orders15

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

Common Area of Inquiry: Pool Expenses What do certain payments represent? How was this information disclosed to pool participants?

16

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

17

Disclosure Documents and Performance Reporting

Operations inconsistent with disclosure Fees and expenses Redemptions Trading strategy Conflicts of interest Banks, carrying brokers, custodians GP and/or CTA ownership interest

Performance recordkeeping Supporting worksheets Partial funding documentation

18

Anti-Money Laundering Program

Applies to FCMs, FDMs and IBsEstablish appropriate red flagsMonitor for suspicious activityProvide training every 12 monthsConduct an independent AML audit every 12 months

19

Commissions ReceivableCan only be current for 30 days

Current Financial Books and Records Net capital computations are required to be prepared and maintained on

a monthly basis—requires current general ledgers and reconciliations

Haircut Charges Balances held in foreign currencies are subject to a haircut

charge against capital

Other IB Areas20

Thank you.