The NFA Examination Process Patricia Cushing, Director, Compliance

2. The NFA Examination Process Patricia Cushing, Director, Compliance Michael Braden, Manager, Compliance James Forst, Manager, Compliance

3. 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

4. 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

5. Use of PQR and PR data in Risk Analysis • Funds under management • Degree of leverage • Types of investments • Performance Returns

6. 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

7. 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

8. 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

9. Areas of Focus and Common Deficiencies

10. Areas of Focus • Renewed focus on Internal Controls • Policies and Procedures • Separation of Duties • Access • Backgrounds of Key personnel • Due Diligence • Risk Management

11. Areas of Focus • Registration of APs and Principals • Promotional Material • Account Opening • Trading • Bunched Orders • Supervision

12. 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)

13. 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)

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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