1. The NFA Examination Process
March 18 and 19, 2015
Patricia Cushing, Director, Compliance
Michael Braden, Manager, Compliance
Jacob Preiserowicz, Special Counsel, Schulte Roth & Zabel

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 IBs, 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 and disaster recovery

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

8. Areas of Focus and 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. 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 not (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. 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

16. 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?

17. 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

18. 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

19. 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

20. Other IB Areas Current Financial Books and Records Haircut Charges
Commissions Receivable
Can 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

21. Thank you.