By: Josh Johnson

Last month, Turnkey discussed the need for firms to begin maintaining all required documents digitally as well as some recent changes to the NFA audit process. As mentioned, due to the pandemic, NFA has not been traveling since March of 2020 and has been conducting all reviews virtually. Turnkey has assisted on many of these virtual reviews and feels it is prudent to share some key additional takeaways.

Don’t Fear the Phone

Early in the NFA audit process, numerous emails as well as written questionnaires* will be used to further NFA’s background information about company operations. This documentation is what also determines NFA overall audit scope. Typically, NFA’s initial requests are straightforward and generally simple to answer.  However, when the actual examination begins, NFA will start inquiring for more detail. While it may be of some advantage to communicate via email, firms should never hesitate to request a phone call with the audit team.  It is important to remember that NFA’s audit process was developed around on-site interaction with firm personnel. During normal reviews the majority of questions from the NFA audit team would typically be asked in a face-to-face meeting.  These meetings allow for a much deeper dialog and understanding of what is occurring at a member firm.  Using the phone, instead of being afraid of it, can greatly reduce the number and variety of documents which may be requested. A phone call can also help firms to avoid even more complex and difficult questions if NFA audit staff misinterprets an answer or does not receive what they are expecting as a response.

It is important to also remember that NFA audit staff are human beings. Using regular verbal communications with them will provide insight into the direction of NFA’s examination.  Via verbal communication it will be easier to discern instances in which firm and NFA language is not matching up. Ensuring that any potential confusion in vernacular is resolved early on will save a tremendous amount of time and headache. Dialog of this nature also builds repour and good will between firms and NFA audit staff.  Turnkey fully believes that it benefits everyone to have regular, open communications via phone calls for at least the first two weeks of the audit.

*CFTC registrants and NFA member firms who have not been reviewed recently may contact Turnkey for a free copy of NFA’s most recent audit questionnaire. To request this information a brief consultation with Turnkey staff will be required, please submit a request here.

Measure Twice, Cut Once

As noted above it is critical to do everything possible to avoid confusion or misunderstandings with firm responses to NFA. For this reason it is imperative to  always ensure the proper documentation is being uploaded to NFA’s regulatory filing system (“RFS”) upon each request.  As Turnkey mentioned last month, firms must create some type of organizational system to allow them to easily gather the requested documents NFA is requesting. Further, a system to sort and document NFA requests will be immensely helpful for the duration of an NFA audit.  Building process around firm interactions with NFA staff and systems will provide a simple way to also double-check that the information provided is accurate and consistent with previous representations prior to finalizing any submission. Providing outdated, incorrect, or inconsistent documents will inevitably lead to follow-up questions and additional scrutiny from NFA examination staff.

Maintain All Written Correspondence

Over the last several years NFA has worked to protect member information through the use of more secure communication mediums. These include the RFS system noted above as well as a  secure and encrypted email system called “secure mail”.  Firms should keep in mind that when NFA utilizes secure mail to send encrypted messages these communications will eventually become inaccessible.  It is critical then for member firms to save all secure mail communications internally after they have been decrypted and read. Keeping these records is particularly important if and when more advanced dialog occurs between NFA and company staff.  In the event there is a finding or disagreement with NFA these records could become critical with respect to a firm’s strategy in defending itself.  Simply put, throughout the entire audit, make it a routine to maintain all written correspondence especially that which is done through the secure NFA email system.

Call Turnkey

One of the most important calls any firm can make prior to an NFA examination is to Turnkey Trading Partners. Our staff of former examiners has assisted hundreds of firms through the audit process since our formation in 2008.  Time and time again our clients have offered praise to Turnkey staff for our ability to manage, assist, and facilitate NFA reviews.  Typically, an examination can take up to six months before being closed. Turnkey can, in many instances, greatly reduce that time.  We can also work to ensure, to the extent possible, audit findings and communications with NFA are kept to a minimum. To learn more about our audit support services please contact us today!

About the author

Josh Johnson has over ten years of experience working with regulatory and compliance matters within the financial services industry.  Prior to joining Turnkey, Josh worked at National Futures Association (NFA) in various roles where he led numerous reviews of NFA member firms. Additionally, Josh worked in the internal audit department at State Street Corporation conducting reviews of the various business units and offerings of the bank. Josh has a degree in finance from the University of Iowa.