The beginning of a new year is typically when Commodity Futures Trading Commission (“CFTC”) registered, National Futures Association (“NFA”) member firms are most focused on growing their book of business. While the launch of new marketing or trading campaigns is important, attention to shifting operational and regulatory issues is just as critical to running a successful brokerage and/or trading operation. For Futures Commission Merchants (“FCMs”), Introducing Brokers (“IBs”), Commodity Pool Operators (“CPOs”), and Commodity Trading Advisors (“CTAs”) the end of 2018 is the perfect time to take an account of company regulatory obligations.
Based on experience with a diverse group of customers and regulatory requirements, the following represents five “hot topic” areas that will impact firms going into 2019. While reviewing this list, keep in mind it is always easier, cheaper, and less painful to be proactive, rather than reactive, when it comes to compliance matters.
1) Anti-Money Laundering
Several years ago, FinCEN required important changes to CFTC registered, NFA member firm Anti-Money Laundering (“AML”) policies. These adjustments required all companies with an AML obligation to update longstanding programs, which for many organizations, had not been adjusted materially for a number of years. These changes were required to be in place no later than May of 2018. Turnkey wrote about this issue during April of this year; please consider “Brokerage Industry AML and KYC Changes Loom Large”. It is important to remember that AML obligations are not only a CFTC and NFA regulatory concern, but they are also a federal matter. In this area in particular outdated or inadequate policies can bring about very costly penalties and regulatory actions. To date, Turnkey has found that many firms did not update their AML programs prior to the aforementioned May deadline as they were required to.
2) Supervision of GIBs and Branches
During 2018, several key regulatory actions were taken by the CFTC, CME, and NFA related to outside office supervision. This has increased regulatory audit scrutiny relative to how firms handle this aspect of their supervisory obligations. Turnkey wrote on this topic during October of this year; please consider “Changes to GIB and Branch Office Supervision”. For 2019 FCMs, IBs, CPOs, and CTAs must ensure that they have a legitimate compliance program in place to supervise outside office locations. To reduce regulatory exposure, a comprehensive internal audit program that is maintained by knowledgeable staff is absolutely necessary. Company’s that are not large enough to have an independent internal audit department may want to consider outsourcing this responsibility. While internal audit departments can still be utilized, the cost, risk, and potential conflict of interest in maintaining such departments may prove to be too difficult for many firms in 2019.
3) ISSP and Cybersecurity
Starting in 2016 all registrants were required to put in place an Information Systems Security Program (“ISSP”) as part of CFTC and NFA cyber-security obligations. Two years after this obligation, NFA has increased both its emphasis and expectations with regard to how they review the programs firms have put in place. Turnkey wrote about these obligations during May of this year; please read “Cybersecurity Review Best Practices for more information.”
4) CPO and CTA Accounting and Ratio Requirements
Several years ago, both CTAs and CPOs were first required to file quarterly reports with the CFTC and NFA. These reports changed during 2017 when several new fields were added to CTA-PR and CPO-PQR filings. Any CTAs and CPOs that do not keep their company accounting on an accrual basis as of today should be very concerned. NFA published guidance related to its expectations for CTA and CPO ratio reporting obligations during the fall of 2018. To learn more about CTA and CPO ratio reporting please read what Turnkey published related to this issue: “CTA/CPO Ratio Errors; NFA PQR and PR filings”.
5) Don’t Procrastinate; A Regulatory Examination Is Coming
It is very easy to procrastinate or get complacent when it comes to compliance matters. For those who have not been audited recently, or possibly ever, it is critical to remember the CFTC, CME, or NFA will conduct an examination of all registered companies eventually. Firms that are fortunate enough to be notified of an upcoming audit, who are unfamiliar with the examination process, or who do not have the staffing to dedicate substantial resources to a review, may want to consider contacting a third-party compliance professional for help. For many firms, outsourcing CFTC, CME, or NFA audit support is one of the best compliance decisions they can make. A regulatory examination is very time consuming and difficult if you are not prepared.
While implementing 2019 growth plans be sure to evaluate your compliance program and look for areas to make improvements. This article was contributed by Turnkey Trading Partners. Turnkey can be contacted at info@turnkeytradingpartners.com or by calling directly to (312) 324-0040.
