Sep 30, 2020 By: Scott Kruse The growing interest in alternative investments over the last several years has enhanced the investing public’s demand for Commodity Pool Operators (CPOs) and Commodity Trading Advisors (CTAs). Since this type of trading is highly specialized, it comes to reason that the operations of CTAs and CPOs would also be highly regulated. Oddly though, a regulatory requirement that is often put at the bottom of both emerging and established asset managers “to-do” list is their company accounting. Commodity Trading Advisors and Pool Operators must keep an accurate set of books at the management company level. It is understandable that CPOs and CTAs might want to focus on trading and raising capital. Clearly, those two activities are the lifeblood of any CPO or CTA. Without performance and assets there is no business. However, running an asset management company is no different from any other type of enterprise. A firm’s company accounting is critical to have up to date and accurate. Furthermore, the Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) also require very specific financial ratios to be included with all quarterly CTA-PR and CPO-PQR filings. Turnkey has been serving and winning awards for our support of CTAs and CPOs for going on fifteen years. It has been our experience that recently regulators are taking a much closer look at how management company accounting is prepared. In particular, during exams NFA is closely scrutinizing the ratios filed on CTA-PR and CPO-PQR forms. Auditors are demanding support for how these figures were calculated to substantiate the legitimacy of the filing. Similarly, examiners also expect a much higher level of accuracy in company accounting records than they may have in years past. Previously CTAs and CPOs who maintained accounting records on a cash basis were given a pass. In fact, in some instances, NFA wouldn’t even consider CTA or CPO management company books and records during an exam. Believe it or not, at the time Interpretive Notice 9071 went into effect (June 30 ,2017), NFA was asking a lot from CPOs and CTAs on a relative basis. At that point, to compile accounting records on an accrual basis going back 12 months was a significant change for some firms. It should come as no surprise then, given NFA’s lax enforcement previously, that many industry CTA and CPO firms have been compiling their accounting incorrectly for years and still are to this day. Recently, Turnkey has noticed that during NFA audits, examiners are starting to ask more about CTA and CPO accounting methodology. In other words, they want to understand book keeping process and record keeping habits. NFA auditors are also regularly asking firms about accrual-based accounting versus cash-based accounting. They similarly want to know about internal controls and accounting process. Additionally, they have an expectation that firms are familiar not only with their quarterly ratio filing obligations on the CTA-PR and CPO-PQR, but also with Generally Accepted Accounting Principles (“GAAP”). CTAs and CPOs who have not been audited within the last two years should beware of this fact. If they are unfamiliar with accrual-based GAAP accounting, it is definitely time to get prepared. NFA interpretive notice 9071 stipulates that the accrual accounting method must be used by CTAs and CPOs with their management company accounting. Additionally, CFTC regulation 4.27 calls for GAAP accounting. Over the years Turnkey has found that established CTAs and CPOs, (especially emerging managers) are more accustomed to cash basis accounting. That is “When we pay a bill it’s recognized as an expense in that period.” Versus the required NFA and CFTC standard of accrual accounting. Which is “It doesn’t matter when we pay the bill, what matters is what time period the expense/bill was incurred.” Firm’s unfamiliar with accrual, GAAP based accounting would be wise to consider learning more or seeking professional help. Turnkey can help To summarize NFA is currently taking a much closer look at the accounting records relating to CTAs and CPOs than they have in the past. Therefore, keeping company accounting records current and accurate will save a lot of headaches in the long run. It is much easier to have company books and records compiled properly from the get-go than having to go back and adjust them to be in compliance with NFA and CFTC standards. Turnkey is one of the industry’s most decorated consulting firms. Unlike other providers we have a dedicated accounting department lead by career industry CPAs. Please contact us at any time to speak with one of our accounting specialists about how we might be able to assist in meeting accounting, operational, or regulatory needs in this area. About the Author Scott Kruse is head of Turnkey’s accounting department. He has been in the commodities and securities industry for nearly 30 years. Scott’s career began in public accounting where he focused on auditing CTAs, FCMs, Broker-Dealers and proprietary trading firms. After leaving public accounting he worked for financial firms ranging from Fortune 50 publicly traded companies to proprietary start-ups. Scott has passed the CPA exam and holds an accounting degree from the University of Wisconsin.