NFA reps say examinations vary, and cooperation is part of the answer

NFA reps say examinations vary, and cooperation is part of the answerPosted by Mike Prokop, Director, Deloitte & Touche LLP

On October 2, 2014, two representatives of the National Futures Association (NFA) — an independent self-regulatory organization for the futures industry — co-led a discussion on that body’s examination approach as part of Deloitte’s Dodd-Frank Compliance Leadership Academy.

Dale Spoljaric, managing director of NFA’s Compliance section, and Michael Brosius, director in NFA’s OTC Derivatives section, pointed out that the NFA has substantial authority. In addition to communicating information about violations to the CFTC, it can also bar an NFA member from doing business with other member firms, discipline members that violate its rules, and facilitate arbitrations between its members. In conducting examinations, the NFA can look at any activity covered by CFTC regulations.

In carrying out these functions, the NFA has identified some of the challenges that introducing brokers (IBs) face. They include implementing compliance programs that address recording, record-keeping, commissions receivable, and anti-money laundering/know-your-customer (AML/KYC) rules. Customer identification for onboarding clients has been an issue in the energy field, the two noted, adding that the NFA has proposed rule changes to address it.

Participants in the discussion asked Spoljaric and Brosius about several current issues in the futures industry.

  • The number of futures commission merchants (FCMs) is declining, and the remaining ones are more concentrated, yet overall, NFA registered firms are on the increase. Spoljaric said the NFA is reexamining its approach too as a result of these trends. Reporting of held customer funds, surveillance capabilities, and NFA staffing are all impacted.
  • Does a company’s overall compliance capabilities affect the NFA’s examination of it? Spoljaric said the NFA will match its examination to the scale of the examinee’s operations, but Brosius said the mandate for the exam is risk-based and the scope of questions and answers is usually set before the process begins.
  • One panelist asked whether the NFA plans to begin examining swap execution facilities (SEFs), and Spoljaric noted the body doesn’t have jurisdiction over them apart from day-to-day operations.
  • Asked whether the NFA would offer a definition of the scope of its examinations, Brosius said it does so on a case basis, prior to the examination of each member firm — a process that includes consulting with the examinee over which personnel to interview.
  • On the timing of examinations, Brosius confirmed a panelist’s sense that two to three weeks was a typical duration for the scope of its current exam cycle, and that timing can vary based on a firm’s complexity, the tools available, and the scope of future exam cycles. Spoljaric said the NFA is willing to use tools that a firm’s own chief compliance officer makes available.

The NFA has found its examinations to be more localized than expected, Brosius said. Because of that, examinations in certain rulemaking areas — especially business conduct standards — remain a challenge.

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