NFA recently adopted an Interpretive Notice entitled NFA Compliance Rule 2-9: CPO Internal Controls System (Interpretive Notice). The Interpretive Notice requires commodity pool operator (CPO) Members, which have the ability to control customer funds, to implement an internal controls framework designed to:
- Protect customer funds; and
- Provide reasonable assurance that the books and records of a CPO's commodity pools are accurate and reliable and that the CPO is in compliance with all CFTC and NFA requirements. The Interpretive Notice will become effective on April 1, 2019.
In order to demonstrate an adequate internal controls system, the Interpretive Notice also requires CPO Members to have a strong control environment, which includes adopting and implementing written policies and procedures that are reasonably designed to ensure that the CPO's operations are in compliance with applicable NFA rules and CFTC regulations. The Interpretive Notice further requires CPO Members to have written policies and procedures that fully explain the CPO's internal controls system and maintain records that support the implementation and effectiveness of its internal controls system.
Although a CPO's internal controls system will vary according to the size and complexity of its operations, an adequate internal controls system must include certain key components:
- Separation of duties, when possible, to ensure that no single employee is in a position to carry out or conceal errors or fraud or have control over any two phases of a transaction or operation; and
- Completion of a risk assessment to identify the CPO's most critical risks with development and implementation of controls that address those risks.
The Interpretive Notice acknowledges that the risks identified during the risk assessment will vary among CPOs, but identifies three risk areas that are generally applicable to most CPOs' businesses—pool subscriptions, redemptions and transfers; risk management and investment and valuation of pool funds; and use of administrators. The Interpretive Notice also provides guidance on appropriate control activities for each of these three areas.
NFA will provide Member education on these requirements prior to the effective date in order to ensure Members understand their obligations. As part of this Member education, NFA will discuss and answer Member questions on the Interpretive Notice during its upcoming Member workshops in Chicago on February 25 and New York on February 27.
More information on the Interpretive Notice is available in the December 10, 2018 submission letter to the CFTC. If you have any questions regarding these amendments, please contact Patricia Cushing, Director, Compliance (pcushing@nfa.futures.org or 312-781-1403) or Dale Spoljaric, Managing Director, Compliance (dspoljaric@nfa.futures.org or 312-781-7415).
