session 5: the nfa audit process moderator: regina thoele, nfa panelists: larry block, kenmar group...

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Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

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Page 1: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Session 5:The NFA Audit Process

Moderator: Regina Thoele, NFAPanelists:

Larry Block, Kenmar GroupJoseph Picone, NFA

Lennox Compass, NFA

Page 2: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Risk-Based Audit Selection

• Concerns noted during a review of the firm’s promotional materials, disclosure documents and/or financial statements

• Funds under management or degree of leverage

• Customer complaints• Referrals NFA receives from other agencies• Time since registration or last audit

Page 3: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

How to Prepare for an NFA Audit

Self-Examination Checklist• First step toward a successful NFA audit• General operations checklist• Supplemental checklists for FCMs, IBs, CPOs

and CTAs• Signed attestation required• If you have questions, contact NFA at (800)

621-3570

Page 4: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Other Available Resources

• Publication: NFA Regulatory Requirements for FCMs, IBs, CPOs and CTAs

• NFA Podcast (10 minutes) and Web Seminar (one hour): “Preparing for an NFA Audit”

• NFA Podcast (10 minutes): “Registration Issues – Principals, APs and Branch Offices

• Appendices to Self-Exam Checklist: AML, ethics training, privacy policy, disaster recovery

Page 5: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

NFA Audit Process

• Pre-exam– Planning Interview– Initial Record Request

• Fieldwork– Opening and Exit Interviews– Document Review/Testing– Additional Record Requests

• Completion of Audit– Report– Corrective Action

Page 6: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Areas of Focus

Page 7: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Areas of Focus

• Registration of APs, Principals, Other Firms • Promotional Material• Disclosure and Performance Reporting• Account Opening• Trading• Bunched Orders • Supervision• Handling of Pool Funds • Financial Reporting

Page 8: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

CPO Audits: New Areas of Focus

• Valuation Policies- Reasonableness- Conflicts of Interest- Disclosure- Exception Reports- FAS 157 Hierarchy

Page 9: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

CPO Audits: New Areas of Focus

• Side Letters/Preferred Redemptions- Compliance with Lock-Up or Gate

Provisions- Disclosure- Just and Equitable Principles

Page 10: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

CPO Audits: New Areas of Focus

• Side Pocket Investments- Reasonableness of the Classification- Valuation

• Strategy Promotion- Due Diligence Process- Multi-Advisor- Fund-of-Funds

Page 11: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Common Audit Deficiencies

Page 12: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Registration

• Unlisted principals

• Unregistered Associated Persons

• Failing to update registration records

• Bylaw 1101

Page 13: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Bylaw 1101: Due Diligence

• Does the account appear to require registration?

• If not, why not (exemption, offshore)

• If yes, why and is it registered?

• Is the pool operator an NFA member?

Page 14: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Bylaw 1101: Where to look

• BASIC

• Part 4 Exemption Look-Up in ORS and BASIC

• Ask firm for copy of exemption

• In all cases, document findings

Page 15: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Disclosure Documents

• Operations inconsistent with disclosure– Fees– Redemptions– Trading Strategy

• All required performance not disclosed• Performance capsule information inaccurate

– Number of accounts– Total assets under management

Page 16: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Bunched Orders

• Procedures for allocating split fills or partial fills

• CTA must conduct a quarterly review of accounts to ensure that bunched orders are allocated in a non-preferential manner

Page 17: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Pool Financial Reporting

Incomplete account statements• Information only included for the individual pool

participant• Statements must include information for the pool in

its entirety• Statements do not properly itemize all required

information- Additions/Withdrawals- NAV per unit

Page 18: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Pool Financial Reporting

Required information beneath the oath on each account statement:•The name of the individual signing the account statement•The capacity in which he or she is signing•The name of the commodity pool operator for whom he or she is signing•The name of the commodity pool for which the statement is being distributed

Page 19: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Performance

• No supporting worksheets• Inappropriate use of composite performance

capsules• Details covered during Session 2

Page 20: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Other Items

• Distribute a privacy policy to its customers upon establishing the relationship and on an annual basis

• Attend ethics training within the time period established in firm’s procedures

• Review/test disaster recovery plan at least annually• Complete Self-Exam Checklist annually

Page 21: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Disciplinary Actions against CPOs and CTAs

Page 22: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

General Pool Fraud

• Paul Greenwood and Stephen Walsh (09-MRA-002)

• Raleigh Capital (09-MRA-006)• M25 and M37 (09-MRA-004)• IAG Capital Management (10-MRA-002)

Page 23: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Regulatory Response

• Prohibition on Pools loaning money to the CPO or an affiliate

• Effective October 1, 2009

• Pre-existing Loans

Page 24: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Pending Matters

• CTA Performance– Unreported accounts– Overstated Rates of Return

• Misappropriation of Pool Funds– False information to NFA– Comingling pool funds– Inadequate disclosure

Page 25: Session 5: The NFA Audit Process Moderator: Regina Thoele, NFA Panelists: Larry Block, Kenmar Group Joseph Picone, NFA Lennox Compass, NFA

Session 5:The NFA Audit Process

Panelists:Roxanne Bennett, Price Asset Management

Jennifer Sunu, NFAMatt Pendell, NFA