Happy New Year! We hope the NIBA membership had a successful 2016. The beginning of a new year is typically a time when firms are focused on plans for growing their book of business. While the launch of new marketing or trading campaigns is certainly important, attention to operational and regulatory issues is just as critical for a successful firm. Compliance matters, in particular, are often overlooked when evaluating firm activities and planning for improvements going into a new year. The start of 2017 is the perfect time for registered firms to take an inventory of their regulatory obligations and implement a strategy that ensures requirements are met on an ongoing basis.
To help NIBA kick off the New Year right, this article will discuss ten of the top things to consider for your 2017 compliance program. These ten things are what Turnkey Trading Partners staff most commonly encounters with our hundreds of clients. While reviewing this list keep in mind it is always easier, cheaper, and generally less painful to be proactive as opposed to reactive with compliance matters. Please take the time today to develop your 2017 compliance plan either internally or by calling us for help. Doing so will be much less painful than being forced to make such considerations when CFTC or NFA regulators are at your door. In no particular order…
1) Supervision of Branches
NFA has recently put more focus on branch offices than in the past. During 2016 a larger than average number of firms were fined due to failure to supervise their branch activity. Ensure that you have a structure in place to supervise branch offices on an ongoing basis. Have a reputable third-party or supervisory staff person conduct and document a thorough review of branch offices. To do this internally you must develop an adequate program for review. This program must consider procedures for addressing any compliance problems promptly and include the retention of records regarding corrective actions.
2) Solicitations
Solicitations can make or break your business. It’s hard enough to close new accounts, it’s even harder if your efforts are met with large fines and additional supervisory obligations. Disciplinary actions for improper solicitations are often coupled with charges of failure to supervise. Such actions can not only be costly, they can come back to haunt a firm including its staff years later. Ensure you have a structure in place for supervisory staff to monitor and regularly review sales solicitations (including online materials and social media commentary) made by APs. A good program includes ongoing training and documentation of routine reviews, including corrective actions.
3) Promotional Material
Related to solicitation, promotional material is a common area of deficiencies in NFA findings. The production of compliant promotional material can be tricky because many of the rules are rather subjective. Remember that all statements of fact must be substantiated, and statements of opinion must be phrased accordingly. Opinions must also have a reasonable basis in fact that can be articulated. Keep a written record of review and approval, such as a promotional material log. It is advisable to have larger pieces, such as websites or presentations, reviewed by a compliance professional or (if you can afford the time delay) submitted to NFA for pre-approval prior to use.
4) Maintaining Adequate Books and Records
In 2017 it is our belief that NFA audits are likely to focus more heavily on the accounting records of member firms. Therefore, it is imperative you keep adequate and accurate books and records at all times. Remember that financial accounting must be in accordance with US GAAP and readily available at any time. Non-financial recordkeeping is also important; especially those non-financial agreements that may impact financials (ie referral agreements, leases, expense sharing between affiliates etc). Implement a reliable system for obtaining and storing complete and accurate records. Make sure that you know all of the applicable requirements and consider a policy for periodic updates. In addition, various firm policies must be reviewed quarterly or annually and written records of the review retained.
5) Performance Reporting
Performance reporting for both Funds and CTAs has always been an area of intense focus for NFA auditors. Regulations in these areas are very specific with regard to how performance calculations are compiled. Ensure that the performance your marketing, producing, or relying upon meets the requirements as laid out by the CFTC. One area that is often missed by firms is accounting for material additions and withdrawals in accordance with the regulations; review the regulation closely and determine what is most appropriate for your performance reporting. IBs soliciting managed futures business may want to ensure performance figures are prepared by either knowledgeable internal staff or a reputable outside third party provider at a minimum. Remember, although perhaps unfair, it is possible to get caught up in sales practice violations for promoting inaccurate third party performance figures to your customers.
6) Net Capital Computations
Just like performance reporting, Net Capital Computations have always been an area of persistent focus from NFA. Ensure that you are correctly calculating your net capital on at least a monthly basis. Remember that you must be able to prove during an NFA audit that you have never been under the net capital requirement, even during an inter-month period. This means you should be able to produce a daily net capital computation figure if you are requested to do so.
7) CPOs and CTAs financial filing requirements
Starting in the second quarter PQR/PR filing, all CTAs and CPOs must include a Current Ratio and a Revenue-to-Expense Ratio with their performance reports. All ratios must be presented in accordance with US GAAP and the Revenue-to-Expense Ratio must be presented on a rolling 12 month period. Although there are no minimum capital requirements for CTAs or CPOs, this is the first step from NFA to begin looking at the financial health of these members. Our view is that initially NFA will be lenient with CTAs and CPOS with regard to their reporting of this information. Towards the end of 2017 however we anticipate NFA becoming increasingly strict about this obligation and the information contained there within. IBs should be prepared to consider asking about these ratios and filings when working with CTAs and CPOs. It is likely only a matter of time before doing so becomes a routine part of manager due diligence.
8) Anti-Money Laundering
Inadequate Anti-Money Laundering programs are very costly in terms of fines. Introducing Brokers need to pay attention to their AML requirements. This includes ensuring that all employees that work in areas susceptible to money laundering, or supervising such employees, have completed their annual AML training on time. Keep apprised of changes and updates in AML and maintain current records. Engage a competent third-party to complete your AML audit before the annual deadline. An item commonly missed in this area is IBs reliance on FCMs to conduct AML. IBs should fully ensure that if they rely on an FCM they are aware of what the FCM has stated it will do on behalf of the IB. All FCM reliance agreements are not created equal.
9) Cyber Security
This new program requirement went into effect in March 2016, and the industry as a whole is still going through adjustments in implementing their cyber security policies (or ISSP). NFA has recently started reviewing ISSP during audits, and citing firms for not meeting the requirements laid out by their Interpretive Notice. Ensure that your ISSP meets the regulation and guidance and be sure that you are meeting your annual training and review requirements. Turnkey is a leader in this space and has developed a couple hundred programs for industry participants. Please feel free to contact us if you have questions.
10) NFA and/or the CFTC Will Eventually Audit You
This is an inevitability. One day you or your firm will get a phone call or a knock on your door from the regulators. Just respond to their questions and requests as they are asked. Provide concise answers and do not offer more than you must. If your firm is fortunate enough to be notified of an upcoming audit, if you are unfamiliar with the process or unable to dedicate substantial time to it, you may want to consider contacting a third-party compliance professional for help. Turnkey has extensive experience with NFA audits and multiple staff members who are former NFA examiners. For many firms, outsourcing audit support has been the smartest use of their compliance budget.
While you implement your 2017 growth plans be sure to evaluate your compliance program and look for areas to make improvements. If you would like assistance with this, or with any of your regulatory needs, contact Turnkey Trading Partners via info@turnkeytradingpartners.com or by calling us directly at (312) 324-0040. We wish you all a prosperous and healthy 2017!
