Since 2012, the number of CPOs, CTAs, and IBs required to register with NFA has seen a dramatic increase. With this increase came a renewed commitment by regulators to not only audit new NFA Members within the first year, but more frequently thereafter as well. The frequency of subsequent on site audits depends upon an analysis of risk factors. Some of the risk factors include but are not limited to:
- Customer Complaints
- Qualifications of Principals
- Principals Prior Firm Regulatory Issues
- Reviews of Promotional Materials
- Regulatory Filing Issues
- Time between Registration and/or last NFA Exam
Of late, NFA has been scrutinizing financial statement footnotes, perusing websites, and searching for industry publications for firm information. Furthermore, information on forms submitted to NFA such as Form PQR, 1FRs, and PRs are also analyzed for risk factors.
Typically, NFA will notify new members two weeks prior to a visit. However, NFA has been known to also show up unannounced. Based on the experience of our client base, Michael Coglianese CPA, P.C. has put together a few tips to make sure your compliance house is in order prior to the on-site audit.
Preparing for an NFA Examination
We highly recommend reviewing the available and recently updated NFA Self-Examination Checklist located on the NFA website. This is only required once a year, however, it is a good idea to review it more often to make sure compliance and policies firms set forth are being adhered to. Frequently testing the implemented procedures perhaps as often as quarterly will help make sure the firm is up to date with internal business, staff, technological developments, and regulatory obligations. Another possibility is to hire an outside firm to conduct a “Mock NFA Audit.” The outside firm has the ability to identify deficiencies in record keeping, compliance procedures, and internal controls. The outside firm should also be able to anticipate questions NFA may ask as well as documents they may request. Below we address the areas of focus for each type of registration, some of which are new and/or with a renewed focus.
Introducing Brokers and FCMs
- Anti-Money Laundering Procedures
- Automated Order Routing Systems
- Financial Statements , Including Net Cap and Seg Testing
- Management Reports
CPOs and CTAs
- Disclosure and Performance Reporting
- Handling of Pool Funds
- Financial Reporting and Valuation of Assets
Areas of Focus: All Categories
- Registration of APs, Principals, and other Firms
- Promotional Material
- Trading and Bunched Orders (CTA and CPO)
- Account Opening and Documentation
- Disclosure and Performance Reporting
- Supervision
- Financial Reporting and Recordkeeping
Common Deficiencies
- Unlisted Principals
- Unregistered APs
- Failing to update Registration Records
- Violating Bylaw 1101: Due Diligence
- Disclosure Documents (CTA and CPO)
- Fees, Redemptions, and Trading Strategies
- Non-Disclosure of Performance
- Inaccurate performance capsule information including number of accounts and total assets under management
- Bunched orders (CTA)
- Procedures for allocating split fills or partial fills
- Bunched orders not allocated in a preferential manner
- Financial Reporting (Pools)
- Statements that do not include pool information in its entirety
- Statements not properly itemized with required information such as Additions and Withdrawals and NAV per unit
- Lack of Oath of Affirmation on Investor Statements
- Performance (Pools, CTA)
- Insufficient supporting worksheets
- Improper use of performance capsules
- Failure to distribute Privacy Policy to customers on an annual basis
- Deficiency in annual Ethics training
- Delinquent AML Procedures and Required Annual Review
- Failure to test and Document Disaster Recovery Plan
- Failure to complete annual Self-Exam Checklist
- Failure to complete Management Attestation of Firm Operations
- Inaccurate reporting on Firm !FR such as Current vs Non-Current Assets (IBs FCM)
- Lack of Net Cap Testing (IBs FCMs)
- Inaccurate recording of accruals (revenues and expenses)
NFA Audit – The Outcome
Prior to the issuance of the examiner’s report, the will conduct an exit interview. During the interview, the NFA Examiner will report findings and note issues that may need to be discussed further or resolved prior to the issuance of the final report. NFA has 5 months to issue its final report. Some of the report conclusions may include closing the examination without findings, the issuance of a deficiency, and/or a referral for enforcement. If a deficiency is found, the firm must respond within 10 business days and document the steps to be taken to resolve the deficiency. We find it is best to address and resolve any deficiencies at the time they arise rather than waiting for a deficiency letter to be issued. If it is determined that the deficiency be referred to NFA’s enforcement staff, these investigations and actions may be required to be disclosed during regulatory filings and therefore, made available to the public.
If you need more details regarding NFA’s renewed areas of focus and common deficiencies, feel free to call us at 630-351-8942. For more information about our firm, feel free to visit www.cogcpa.com.
