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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 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
Areas of Focus• Registration of APs and Principals • Promotional Material• Account Opening• Trading• Bunched Orders • Supervision
Category-Specific Areas of FocusCPOs 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
• 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
• 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 CategoriesPromotional 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
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 areasCommissions 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
• 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
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 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 ReportingOperations 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 ProgramCFTC 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