NFA Examination Process: Comprehensive Guide & Resources

1. The NFA Examination Process October 22 & 23, 2014 Patricia Cushing, Director, Compliance Cheryl Tulino, Director, Compliance Frank Carbonara, Manager, Compliance

2. 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

3. 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

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

5. 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

6. 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

7. Section Title NFA Exam Process Pre-exam “Field work” • Completion of Exam • Planning Interview • Initial Record Request • Opening and Exit Interviews • Document Review/Testing • Additional Record Requests • Report • Corrective Action

8. Areas of Focusand Common Deficiencies

9. Areas of Focus Renewed Focus on Internal Controls • Policies and procedures • Separation of duties • Access • Backgrounds of key personnel • Due diligence • Risk management

10. Areas of Focus • Registration of APs and principals • Promotional material • Account opening • Trading • Bunched orders • Supervision

11. Section Title Category-Specific Areas of Focus CPOs and CTAs FCMs, FDM and IBs • 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)

12. Bylaw 1101: Due Diligence • Does the account appear to require registration? • If not, why? (exemption, offshore) • If yes, why and is it registered? • Is the pool operator an NFA member? • Annually, review exempt entities (exemption affirmation)

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. Thank you.