NFA Regulation, Compliance and Examinations

Information about NFA Regulation, Compliance and Examinations

Published on August 10, 2014

Author: Miles.Peterson



National Futures Association Regulation, Compliance and Examinations: National Futures Association: Daniel Driscoll, Executive Vice President and COO Thomas Sexton, Senior Vice President/General Counsel Regina Thoele, Senior Vice President, Compliance Patricia Cushing, Director, Compliance National Futures Association Regulation, Compliance and Examinations Newly Registered CPOs and CTAs: Dodd Frank related changes that have caused an influx of Commodity Pool Operators (CPOs) and Trading Advisors (CTA) Rescission of 4.13(a)(4) exemption for private funds Reinstatement of marketing and trading restrictions to 4.5 mutual fund exemption Change in the definition of commodity interest to include swaps Increase in NFA Members Approximately 600 newly registered CPOs Commodity Pools increase from 1700 to 6000 Newly Registered CPOs and CTAs 2 New Requirements and Rule Changes: New Requirements and Rule Changes 3 CFTC and SEC Harmonization of Rules: For Registered Investment Companies (RICs) who can no longer avail themselves of the exclusion in CFTC Regulation 4.5 Substitute Compliance for Disclosure and Reporting requirements Requires the CPO to file a notice with NFA RICs who comply with SEC requirements in these areas will be deemed to be in compliance with the CFTC’s requirements Pools with less than three year operating history must disclose performance of all accounts and pools managed by the CPO pursuant to a substantially similar program Publish NAV/share information CFCs of a RIC may file consolidated annual and quarterly reports Requires the CPO to file notice pursuant to CFTC 13-51 No Action CFTC and SEC Harmonization of Rules 4 Changes that impact all CPOs and CTAs: Pool and CTA Disclosure Documents may be used for 12 months rather than 9 months. Still must be updated timely for material changes. CPOs do not need to obtain an Acknowledgement of Receipt of Disclosure Document from pool participants. CTAs must still obtain. CPO and Pool Records may be maintained at an appropriate third party rather than at the CPO’s main office Notice filing required Acknowledgement Letter from third party also required to be filed Acceptable third parties include the pool’s administrator, distributor, custodian, bank or registered Broker/Dealer Changes that impact all CPOs and CTAs 5 Identity Theft Prevention Policies: CFTC and SEC passed Identity Theft Red Flag Rules with a November 2013 compliance date (CFTC Regulations Part 162) All registrants must develop and implement a written Identity Theft Prevention Program designed to detect, prevent and mitigate identity theft with respect to their clients and pool participants Identify relevant Red Flags Detect Red Flags Respond appropriately to any detected Red Flags Ensure Program is updated periodically to reflect changes in risks to customers and to the safety and soundness of the registrant from identity theft Registrant’s Board of Directors or appropriate committee must assist in the development of the program and approve the program Requires appropriate training of staff and supervision Identity Theft Prevention Policies 6 Amendments to 2-45 Interpretive Notice: NFA Compliance Rule 2-45 prohibits the loan of pool funds to the CPO or affiliates Interpretive Notice amended to clarify transactions that are not considered to be loans. Certain Securities Borrowings/Securities Loans Securities Loans for Cash Financing Guarantee Obligations Repurchase Agreements and Reverse Repurchase Agreements Tax Related Distributions Transactions permitted by the Investment Company Act of 1940 and its exemptive rules No Action Letters and Exemptive Orders issued the SEC Amendments to 2-45 Interpretive Notice 7 Quarterly Reporting to NFA: Pools report quarterly to NFA CPO must enter the following information: Identity specific relationships (pool’s administrator, carrying broker(s), trading manager(s) and custodian(s), etc) Statement of changes in NAV for reporting period Monthly performance for the period Schedule of investments with 5% threshold Depending on the size of the CPO, additional information may be collected to satisfy CFTC requirements Schedule B: Pool strategy and borrowing Schedule C: Aggregated investments and risk metrics Form PF filers still have a PQR filing requirement with NFA Quarterly Reporting to NFA 8 Updates to the PQR Process: NFA’s Quarterly reports amended to better coincide with information required to be filed pursuant to the CFTC’s CPO-PQR XML Upload Feature announced July 12, 2013 Users must submit a request to use this feature Non-RICs must seek relief from CFTC to consolidate quarterly reports Updates to the PQR Process 9 Quarterly Reporting to NFA: CTAs report quarterly to NFA CFTC Regulation 4.27 requires CTAs to file annual reports due 45 days after December 31 NFA Compliance Rule 2-46 requires CTAs to file quarterly reports on a program by program basis Identify specific relationships such as carrying brokers, introducing brokers, other commodity trading advisors, and commodity pool operators for any pools managed. Assets under management for reporting period Pool assets directed by the CTA Monthly performance All reports filed electronically through NFA’s EasyFile system Quarterly Reporting to NFA 10 CTA Quarterly Reports: Programs excluded from reporting requirements: Programs traded by regulated and exempt pools operated by a registered CPO Programs for which the CTA allocates the assets to a sub-advisor(s) Managed account programs that trade parallel to pools listed with NFA Programs that do not trade commodity interests or have not traded commodity interests in the past 12 months Programs customized for one client CTA Quarterly Reports 11 NFA Examinations and the Disciplinary Process: NFA Examinations and the Disciplinary Process 12 Trends in Disciplinary Actions: Trade Allocation Schemes CPOs/CTAs who place bunched orders must provide the information to the FCM: Identify accounts included in bunched order Number of contracts to be allotted to each account Instructions for the allocation of split and partial fills among accounts When information should be sent to FCM: At or before the time the order is placed (pre-file instructions) No later than the end of the day (post execution allocation) Split or partial fills must be allocated in a non-preferential manner Performance Reporting Issues Pool Loans Trends in Disciplinary Actions 13 Request for Comment: Comments due April 15, 2014 (1) Capital Requirements for CPOs and CTAs Should they exist? How should minimum be established? How to calculate? Financial Reporting by CPO and CTAs Other ideas for ensuring registrants have sufficient funds to operate as a going concern (2) Other Customer Protection Measures Request for Comment 14 Request for Comment: Other Customer Protection Measures Independent Third Party Authorization for Disbursements of Pool Funds Current Process? Costs? Qualification Standards? NAV Valuation and Monthly or Quarterly Reporting Performance Results Current Process: In-house or Third-party? Third-party impact on integrity of values? Request for Comment 15 Request for Comment: Other Customer Protection Measures (continued) Verification of Pool Assets Impediments? Frequency? Inactive Members Should inactive members remain NFA Members? Definition of inactive member? Timing of Membership withdrawal? Again, comments are due by April 15, 2014 Request for Comment 16 Developments in Examinations: Use of PQR data in NFA’s Risk Management System RMS helps indentify firms to be scheduled for an exam based on a series of primary and critical risk factors PQRs populate several of the risk factors Renewed focus on Internal Controls Qualifications of the People Procedures Processes Developments in Examinations 17 NFA Membership and Bylaw 1101: NFA Members can only do commodity interest business with entities that are properly registered or exempt from registration Carrying Brokers and Trading Advisors Pools into which a Fund-of-Funds invests Pool Participants and CTA clients Annual Affirmation Process for exempt pools Due by March 1 st each year Failure to affirm eliminates a pool’s exemption NFA Membership and Bylaw 1101 18 Marketing and Advertising: NFA Compliance Rule 2-29 outlines requirements with respect to a firm’s promotional material Members shall not use any material which: Is likely to deceive the public Contains any material misstatement of fact Mentions possibility of profit unless accompanied by an equally prominent statement of the risk of loss Includes any reference to actual past trading profits without mentioning that past results are not necessarily indicative of future results Includes any specific numerical or statistical information about past performance of any actual accounts unless information is and can be demonstrated to NFA to be representative of actual performance for the same time period of all reasonably comparable accounts Statements of opinion unless clearly identifiable as such and have a reasonable basis in fact Post JOBS Act Marketing restrictions for 4.7 and 4.13(a)(3) exemptions Marketing and Advertising 19 Delegation of CPO functions: General Partner or Fund Directors delegate rights and obligations to an appropriate third party, a registered CPO Legal/Offering documents must allow delegation GP/Directors and registered CPO are jointly and severally liable with respect to any violations Must file No Action request Delegation of CPO functions 20 Business Continuity and Disaster Recovery: Guidance to help better prepare for future events that threaten to disrupt market operations Preparation for a widespread disruption Planning for alternative locations Telecommunications Services and Technology Communication Plans Regulatory and Compliance considerations Reviewing and Testing Business Continuity and Disaster Recovery 21 NFA Examinations: Common Exam Findings Reviewing and Testing BC/DR Plan Pool loans Supervision of Trade Allocations Performance Reporting : inadequate supporting documentation, errors Promotional Material: misleading statements Unlisted Principals Operations inconsistent with disclosure Undisclosed conflicts of interest Failure to accrue for all pool liabilities NFA Examinations 22 A Look Forward: Analyze Responses to the Request for Comment CTA Disclosure Document Template Cyber Security Interpretive Notice Incorporate Identity Theft Prevention Program into NFA Rules Internal Control Interpretive Notice Guidance for FCMs currently pending with CFTC A Look Forward 23 For More Information: NFA’s Information Center (800) 621-3570 [email protected] For More Information 24

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