the nfa examination process march 18 and 19, 2015 patricia cushing, director, compliance michael...
TRANSCRIPT
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
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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
and 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 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
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?
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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 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
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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
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