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In the past year alone, NFA took four Member Responsibility Actions ("MRAs") against Forex Dealer Members ("FDMs") that were under their minimum capital requirements. In all four cases, the firms had inadequate internal controls over their financial books and records. NFA took an additional MRA against an FDM that had sufficient capital but kept inadequate and confusing records.
In NFA's experience, over the past few years many firms have entered the retail forex business with limited business and financial expertise. Some of these firms also use unknowledgeable personnel to handle their day-to-day bookkeeping. Furthermore, the fact that these are dealer markets makes the financial recordkeeping more complex than it is for a firm that is strictly acting as an intermediary. Our experience also shows that the financial problems at these firms are compounded by the fact that many of the new FDMs-and even some of the more established ones-use relatively unknown accounting firms that may not have experience auditing companies with more complex financial requirements. As a result, FDMs have a much higher incidence of financial problems than traditional FCMs.
The new rule ensures that FDMs have proper internal controls and a means to evaluate those controls. Financial Requirements Section 15 has three prongs.
- It requires FDMs to provide NFA with an internal control report prepared and certified by an independent public accountant qualified to certify financial statements for public companies (i.e., a firm registered and in good standing with the Public Company Accounting Oversight Board). The Member is required to provide this report before commencing its retail forex business. NFA staff is authorized to require an FDM to provide subsequent internal control reports based upon a belief that an FDM's internal controls are inadequate.
- NFA staff is authorized, in circumstances when it believes that an FDM's financial records are inadequate, to require an FDM's annual financial statements to be certified by an independent public accountant qualified to certify financial statements for public companies.
- Each FDM is required to have an AP/principal who is responsible for supervising the firm's financial functions. This individual is subject to discipline if the firm's internal controls are inadequate either in their design or because they are not followed. The amendments to the interpretive notice clarify that part of this supervisory responsibility includes hiring and retaining qualified accounting staff and the firm's independent auditor.
Staff sent the proposal to FDM Members for their comments. NFA received thirteen comments.
Eleven commenters supported the proposal, although four suggested modifications. One of these commenters recommended that all NFA Members holding customer funds be required to meet the same internal control standards. While this suggestion has some merit, other types of Members have not exhibited problems similar to FDMs. Two commenters suggested that NFA require all Members to have their annual financial statements certified by a registered CPA firm that has gone through at least one PCAOB "peer review." Adopting this suggestion could eliminate some accounting firms that are experienced in auditing FCMs but do not audit public companies or have only recently become registered (and therefore have not yet gone through a PCAOB peer review). Therefore, consistent with the concerns raised by some members of the FCM Advisory Committee regarding imposing a blanket requirement for certification by a PCAOB registrant, NFA is not implementing the commenter's suggestion at this time.
Another commenter that supported the proposal noted that not all PCAOB-registered CPAs understand CFTC and NFA financial requirements, and it recommended that the rule describe the differences between those requirements and securities requirements in order to guide accountants auditing firms in this industry for the first time. NFA staff understands this concern and will continue to work with the industry to educate CPAs who audit FCM financial statements.
One commenter supported most of the provisions in the proposal but objected to what it interpreted as a requirement that the firm's CFO become an AP. Although the rule requires an AP/principal to have ultimate supervisory responsibility for the firm's financial books and records, that individual need not be the CFO. If the CFO reports to the CEO, for example, the CEO's registration could satisfy the proposed requirement.
The other commenter objected to any requirement that firms use a PCAOB registered accountant since, in the commenter's opinion, those accountants have no greater expertise than unregistered CPAs and the requirement will significantly reduce the pool of available accountants (thereby increasing the cost to the FDM and the investing public). As noted above, however, under the rule an FDM is permitted to use a non-PCAOB accountant to certify its financial statements unless NFA directs otherwise based upon its belief that the FDM's financial records are inadequate. Although the rule would require new FDMs to have an internal control audit by a PCAOB accountant, these accountants-while they may not have experience with NFA firms-regularly conduct internal control audits. Most accountants who certify financial statements for NFA Members are already registered with PCAOB, and its list includes many individual CPAs, indicating that the registration requirement does not discriminate against smaller accounting firms.
The new rule will help ensure that FDMs have adequate internal controls and reliable financial statements that their counterparty customers can depend on.