Session 5:The NFA Audit Process

Panelists:Roxanne Bennett, Price Asset Management

Jennifer Sunu, NFAMatt Pendell, NFA

Risk-Based Audit Selection

• Concerns noted during a review of the firm’s promotional materials, disclosure documents and/or financial statements

• Funds under management or degree of leverage

• Customer complaints• Referrals NFA receives from other agencies• Time since registration or last audit

Self-Examination Checklist

• First step toward a successful NFA audit• General operations checklist• Supplemental checklists for FCMs, IBs, CPOs

and CTAs• Signed attestation required• If you have questions, contact NFA at 1-800-

621-3570

Other Available Resources

• Publication: NFA Regulatory Requirements for FCMs, IBs, CPOs and CTAs

• NFA Podcast (10 minutes) and Web Seminar (one hour): “Preparing for an NFA Audit”

• NFA Podcast (10 minutes): “Registration Issues – Principals, APs and Branch Offices

• Appendices to Self-Exam Checklist: AML, ethics training, privacy policy, disaster recovery

NFA Audit Process

• Pre-exam– Planning Interview– Initial Record Request

• Fieldwork– Opening and Exit Interviews– Document Review/Testing– Additional Record Requests

• Completion of Audit– Report– Corrective Action

Areas of Focus

Areas of Focus

• Registration of APs, Principals, Other Firms • Promotional Material• Disclosure and Performance Reporting• Account Opening• Trading • Supervision• Handling of Pool Funds • Financial Reporting

CPO Audits: New Areas of Focus

• FAS 157 Hierarchy

• Valuation Policies- Reasonableness- Conflicts of Interest- Disclosure- Exception Reports

CPO Audits: New Areas of Focus

• Side Letters/Preferred Redemptions- Compliance with Lock-Up or Gate

Provisions- Disclosure- Just and Equitable Principles

CPO Audits: New Areas of Focus

• Side Pocket Investments- Reasonableness of the Classification- Valuation

• Strategy Promotion- Due Diligence Process- Multi-Advisor- Fund-of-Funds

Common Audit Deficiencies

Registration

• Unlisted principals

• Unregistered Associated Persons

• Failing to update registration records

• Bylaw 1101

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?

Bylaw 1101: Where to look

• BASIC

• Part 4 Exemption Look-Up in ORS and BASIC

• Ask firm for copy of exemption

• In all cases, document findings

Disclosure Documents

• Operations inconsistent with disclosure– Fees– Redemptions– Trading Strategy

• All required performance not disclosed• Performance capsule information inaccurate

– Number of accounts– Total assets under management

Bunched Orders

• CTA must conduct a quarterly review of accounts to ensure that bunched orders are allocated in a non-preferential manner

Pool Financial Reporting

Incomplete account statements• Information only included for the individual pool

participant• Statements must include information for the pool in

its entirety• Statements do not properly itemize all required

information- Additions/Withdrawals- NAV per unit

Pool Financial Reporting

• Required information 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

Performance

• No supporting worksheets• Inappropriate use of composite performance

capsules• Details covered during Session 2

Other Items

• Distribute a privacy policy to its customers upon establishing the relationship and on an annual basis.

• Attend ethics training within the time period established in firm’s procedures

• Review/test disaster recovery plan at least annually• Complete Self-Exam Checklist annually

Session 5:The NFA Audit Process

Panelists:Roxanne Bennett, Price Asset Management

Jennifer Sunu, NFAMatt Pendell, NFA