May 28, 2021 By: Greg Baracy Since last March, the world has grappled with the transformational effects of the Coronavirus (Covid-19) pandemic. A fundamental shift in how industries operate unfolded before our very eyes. Old standards were replaced almost overnight by newer and more efficient ones. As a result of Covid-19, both the Commodity Futures Trading Commission (“CFTC”) and National Futures Association (“NFA”) have had to rethink how regulatory audits will continue. A similar re-evaluation of onsite audits for Guaranteed Introducing Broker’s (“GIB”) and Introducing Broker’s (“IB”) branch offices has also been ongoing. Over a year into this “Next Normal”, many registered firms have still failed to adapt to the process of the future. Now it’s looking like they’ll have to based on some of the comments from recently NFA examinations that Turnkey has assisted with. NFA Expectations for Remote Work During 2020 NFA gave a pass to staff working at home due to the risks of the pandemic. A number of regulatory notices as well as actual CFTC relief was issued to accommodate Covid-19. A year, and one hundred million plus vaccines later, these notices are being rethought. NFA’s position in 2021 is that the relief issued in 2020 has largely expired as of December 31, 2020. While they still remain accommodating regarding staff working from home, NFA now views those staff members to be working from home as part of the firm’s “risk assessment” plan. What does this mean? Practically speaking it means that firms now need to justify staff working from home under a risk analysis and that Covid-19 is not, in and of itself, a valid excuse covered by interpretive notice or relief in NFA’s eyes. What the above also indirectly means, is that presumably, staff continuing to work from home will be expected to take the Series 30 exam and list as a branch office if they are registered as Associated Persons. Sooner or later this reality will come to all CFTC regulated businesses. How organizations respond to life after Covid-19 will yet again depend heavily on their ability to leverage electronic record keeping and supervisory systems. From the File Cabinet to the Cloud Given the financial industries reluctance to change, far too many regulated firms still have a heavy reliance on maintaining only physical records. This can pose a significant compliance risk if records are lost or damaged. A policy of only maintaining physical records is further exacerbated by the current regulatory audit approach during the pandemic. Firms with a heavy reliance on physical records should begin working toward a digital solution immediately. This is necessary not only for redundancy but also to meet the new demands of remote auditors. A transition from hard copies to digital will take time and could be painful. Firms should begin by scanning physical documents onto local hard drives. While doing this be sure to label each file accurately and then store them in an appropriate corresponding folder. Take the time to think through how company records most logically can be archived. The entire process could be slow going depending on how many physical files have been accumulated over the years. There is a silver lining: 1) regulatory records in almost all instances are only required to be retained for 5 years from their creation date, 2) Most regulators require only the most recent 2 years of records to be readily available, and 3) once physical documents have been digitized, they’ll be saved and available forever. After company files have been converted, be sure that a process for how new files are received, scanned or saved is in place. This will ensure that going forward everything remains in digital format. After physical records have been digitized, firms will face another tough decision. After consulting an IT professional, firms will need to weigh the positives and negatives of saving records locally or choosing a secure cloud-based platform. In Turnkey’s experience most firms in the industry have moved away from localized servers. Almost all registrants are currently using some form of distributed, cloud based, storage. Even more sophisticated registrants use cloud-based storage offered by Amazon, Google, or Rackspace. In our experience the most commonly used platforms for small to medium sized firms are the enterprise versions of Dropbox, Google Drive and OneDrive by Microsoft. After choosing a cloud-based platform, then sync company hard drives with the selected service provider to ensure that all digitized documents are properly maintained. Those unfamiliar with cloud-based storage options, using Dropbox as an example, can learn all about the step-by-step process by clicking here. Converting records to a digital format will allow for access to records from anywhere on Earth as long as you have an internet connection. Virtual Review Expectations and Preparation Previously NFA member firms had their annual reviews conducted on-site and in-person, Covid-19 changed all of that. Going forward, all outside office reviews, including those of FCMs, IBs, GIBs, CTAs, and CPOs can be conducted remotely via a virtual meeting of some type as part of the “Next Normal”. This means that all the paper documents that would normally be printed out and stacked on a large table for the auditor to sift through must now be transmitted digitally. Firms that have gone to digital record keeping will be well prepared for this type of review. Firms that have not will be (and have been) in for a very rude awakening. The scheduling portion of the audit/review process will be very similar to audits of the past. However, rather than requesting documents to be made readily available when the auditor arrives, the auditor will request documents be transmitted digitally ahead of time. This will allow for them to begin reviewing the files and discuss any follow up questions they may have during a virtual meeting. Firms should assume going forward that they will be expected to have the ability to transmit any and all documents requested by an auditor, with no exceptions. To Turnkey’s knowledge it is not possible or sufficient (nor is it prudent) to mail physical records to regulators, FCMs, or third-party examiners. Virtual Review Cheat Sheet Since the Covid-19 pandemic last March, Turnkey has conducted over one hundred remote examinations. Based on our experience, below is a list of “Do’s and Don’ts” when it comes to your virtual examination: Do: Confirm as soon as possible the date/time of the virtual review from the auditor Be responsive to any and all requests Have all compliance related files properly labeled and stored digitally to their respective folder so they’re easy to find and to transmit Meet document transmission deadlines as set forth by the auditor Transmit all requested files in their entirety Download and test any virtual meeting platforms that will be used to conduct the audit ahead of time Reach out for help if you need assistance early; ensure you understand the digital document request and file transmission process. Do Not: Ignoring outreach from your auditor Send less than the full list of requested documents Transmit incomplete files or provide records in an inappropriate format Avoid phone pictures, holding documents up to a video conference camera etc. Wait until the last minute to transmit documents, please be respectful of request deadlines Conclusion It is Turnkey’s view that Covid-19 has forced the financial world into keeping digital records once and for all. This shift in how business operates has been in the works for a long time but is now standard operating procedure. Digital records and transmission of documents is the current and future of how CFTC and NFA regulated business will operate. In order to properly function in the “Next Normal”, an adaption and migration from physical files to digital storage is critically important. The change initially may seem a bit painful, but in the end will make operating your business much easier. Turnkey would advise, if you haven’t already, getting started today in preparation for your next digital review. The sooner the process begins, the sooner you’ll say “I should have done this years ago.”