O c t o b e r 2 2 & 2 3 , 2 0 1 4
Patricia Cushing, Director, Compliance
Cheryl Tulino, Director, Compliance
Frank Carbonara, Manager, Compliance

Risk-Based Exam Selection
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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
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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
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Funds under management
Degree of leverage
Types of investments
Performance returns

How to Prepare for an NFA Exam
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Self-Examination Checklist
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First step toward a successful NFA exam
General operations checklist
Supplemental checklists for FCMs, IBs, CPOs and CTAs
Signed attestation required

Other Available Resources
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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

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

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

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

Section Title
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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)

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 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)

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 BASIC-Registration Status
 Part 4 Exemption Look-Up in ORS and BASIC
 Ask client for copy of exemption
 In all cases, document findings

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 Promotional Materials and Sales Practices
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Procedures, review and approval
Balanced presentation
 Registration, Common Deficiencies
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Unlisted principals and branch offices; unregistered APs; APs not terminated
Failing to update registration records
 Tape Recording Requirements
 FCMs, IBs and certain CTAs

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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

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 Commissions receivable
 Can only be current for 30 days of due date
 Coding of Accounts
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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

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 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 nonpreferential manner

Pool Financial Reporting, Valuation of Assets
And Handling of Pool Funds
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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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 Required information is missing beneath the oath on each account statement:
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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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Prohibition on pools loaning money to the CPO or an affiliate:
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Interpretive Notice outlines permissible transactions
Receivables from general partner may be deemed “loans” in certain circumstances

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 Operations inconsistent with disclosure
 Fees
Redemptions
Trading strategy
Conflicts of interest
Banks, carrying brokers, custodians
GP and/or CTA ownership interest
 Performance Recordkeeping
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Supporting worksheets
Partial funding documentation