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Necessary Preparation for NFA Exams

Sunday, April 20, 2014

Without proper preparation and an adequate compliance program, the National Futures Association (NFA) Exam can be burdensome and lead to NFA disciplinary action. Beginning in 2013, many investment advisers to registered funds and controlled foreign corporations (CFCs) are now required to register as commodity pool operators (CPOs) and become members of the NFA. The NFA will examine a newly registered CPO within the first year and other CPOs every three to five years; though CPOs may be examined more frequently as deemed necessary based on NFA review of assets under management, financial statements, advertising materials, and customer complaints.

The NFA sometimes makes a surprise on-site visit, but usually the NFA contacts the CPO by phone two weeks prior to the on-site examination of the CPO and then sends an initial document request list. This list usually requests the CPO’s (1) CFTC compliance policies and procedures, financial records, organizational documents, investor records, performance advertising (2) lists of: principals and associated persons, sub-advisers and other fund service providers, futures commission merchants, swap dealers, and (3) trade blotter, a list of securities held by each fund, and a description of brokerage arrangements.

The NFA staff will then take a week or so to conduct an on-site review of the CPO’s business and investment activities, and will focus on the review of: (1) the CPO’s compliance policies and procedures; and the resulting CPO’s compliance with rules and procedures including NFA rules, CFTC’s Harmonization Rules, recordkeeping, reporting, etc., (2) the CPO’s annual self-examination process (3) CPO advertising materials, and (4) proper registration of CPO employees. If the NFA determines the CPO is potentially violating NFA rules, a written report will be issued and ultimately an enforcement action by complaint may be issued to the CFO.

CPOs should be prepared for a possible NFA examination at any time, by maintaining updated compliance documents, conducting the annual self-examination, and conducting a mock NFA examination. Once the CPO becomes aware of a pending NFA examination, the CPO should contact a consultant with expertise about the NFA’s examination process and have the consultant review information and documents before submittal to the NFA. The consultant should review e-mails and other communications. Whether or not to divulge information that may be protected by attorney-client privilege should be determined on a case-by-case basis. A log of documents provided to NFA staff should be maintained. The CPO should contact its external auditor, as accounting issues may arise during examination. The CPO should advise employees about the NFA staff’s visit, and designate a senior officer to serve as an “exam liaison” with the NFA staff and advise the other employees the “exam liaison” will provide all the information to NFA staff and should be present during any discussions and interviews with NFA staff. All questions and document requests/submittals should be directed through the “exam liaison”. NFA staff should be provided with workspace and a pleasant work environment, as well as prompt responses to assure integrity and competence of the CPO.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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