The NFA Examination Process November 6, 2014 Regina Thoele, Senior Vice President Patricia Cushing, Director, Compliance J.P. Bruynes, Partner, Akin Gump Strauss Hauer & Feld LLP

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 2

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 3

Use of PQR and PR data in Risk Analysis  Funds under management  Degree of leverage  Types of investments  Performance Returns 4

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 5

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 6

Pre-exam  Planning Interview  Initial Record Request  Opening and Exit Interviews  Document Review/Testing  Additional Record Requests NFA Exam Process “Fieldwork” 7 Completion of Exam  Report  Corrective Action

Areas of Focus and 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 9

Areas of Focus  Registration of APs and Principals  Promotional Material  Account Opening  Trading  Bunched Orders  Supervision 10

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 11

 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 Diligence 12

 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 look 13

 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 Categories 14

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 15

 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 Other FCM, FDM and IB areas 16

 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 Orders 17

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 18

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 19

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 20

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 21

Thank you