The NFA Examination ProcessNovember 6, 2014

Regina Thoele, Senior Vice PresidentPatricia Cushing, Director, ComplianceJ.P. Bruynes, Partner, Akin Gump Strauss Hauer & Feld LLP

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

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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

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Use of PQR and PR data in Risk Analysis

Funds under management Degree of leverage Types of investments Performance Returns

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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

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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

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Pre-exam

Planning Interview Initial Record Request

Opening and Exit Interviews

Document Review/Testing

Additional Record Requests

NFA Exam Process

“Fieldwork”

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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

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Areas of Focus

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

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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

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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

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

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Commissions receivableCan 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

Other FCM, FDM and IB areas16

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 Orders17

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

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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

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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

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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

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Thank you