The National Futures Association proposed an interpretive notice to provide commodity pool operators with guidance to design and implement adequate systems of internal controls in order to comply with their general obligation of supervision.
Although NFA recognizes that what constitutes an “adequate internal control system” may vary from CPO to CPO based on its size and complexity of operations, NFA will require all CPOs to formally implement an internal control system designed to prevent fraudulent actions by employees, management and third parties; to help secure the integrity of customer funds; and to “provide reasonable assurance” that financial reports are accurate and that a CPO complies with applicable Commodity Futures Trading Commission and NFA requirements. CPOs should also have an escalation policy for employees to report violations of their internal control systems to management, and “whether and when a matter should be reported to [a] firm’s regulator.” A CPO’s internal control system should be documented in writing.
Under the proposed NFA guidance, CPOs must conduct a periodic risk assessment to determine where their most “critical” risks arise and design controls to address those risks. Critically, persons involved with handling pool funds, trade execution activities, financial records and risk management should be different from persons who supervise such activities. The NFA recommends that all CPOs' internal control procedures should address pool subscriptions, redemptions and transfers; risk management and investment; the valuation of pool funds; and the use of administrators.
NFA’s proposed guidance should be effective by year-end, unless objected to by the CFTC.
Separately, NFA also proposed rule changes to incorporate references to swaps, counterparties and related parties , as appropriate, in relevant rules, and to make clear that certain of its rules apply to all commodity interests, while some to only specific membership classes.