Starting a Commodity Pool

Starting a Commodity

Pool

32-1 Bergen Ridge Rd. North Bergen, NJ 07047

Phone: 201-724-9839 Fax: 201-868-6570

Starting a Commodity Pool

b y

John Freed

President, ASJ International, Inc.

C o p y r i g h t © 2 0 1 3 b y A S J I n t e r n a t i o n a l , I n c . A S J I n t e r n a t i o n a l , I n c . d o e s n o t o f f e r l e g a l a d v i c e a n d n o t h i n g i n t h i s d o c u m e n t s h o u l d b e c o n s t r u e d a s b e i n g l e g a l a d v i c e . T h e a u t h o r h a s m a d e e v e r y e f f o r t t o p r o v i d e u p t o d a t e a n d a c c u r a t e i n f o r m a t i o n , b u t i t m a y b e a d v i s a b l e t o c o n s u l t a n a t t o r n e y o r t h e p r o p e r r e g u l a t o r y b o d i e s . T r a d i n g f u t u r e s a n d o p t i o n s i s e x t r e m e l y r i s k y a n d i s n o t f o r e v e r y o n e . N o r e p r e s e n t a t i o n i s m a d e b y t h i s d o c u m e n t r e g a r d i n g t h e a p p r o p r i a t e n e s s o f d e r i v a t i v e t r a d i n g f o r a n y o n e .

EXECUTIVE OVERVIEW

S t a r t i n g u p a c o m m o d i t y p o o l i s a d i f f i c u l t t a s k t h a t r e q u i r e s c a r e f u l a t t e n t i o n t o d e t a i l . F r o m r a i s i n g m o n e y t o c o m p l y i n g w i t h a l l r e g u l a t i o n s t h e r e i s a l o t t o d o e v e n b e f o r e y o u b e g i n t r a d i n g . T h i s p a p e r w i l l g i v e y o u a n o v e r v i e w o f t h e p r o c e s s a n d h e l p y o u a l o n g t h e w a y . B u t y o u s h o u l d n o t h e s i t a t e t o s p e a k t o a n a t t o r n e y o r t o t h e N F A i f y o u h a v e a n y q u e s t i o n s o n h o w t o p r o c e e d .

SETTING UP THE BUSINESS

The primary focus of setting up a commodity pool is profitable trading. But before trading can even begin a variety of activities must be completed. These activities include:

 Selecting a Corporate Structure  Planning your Business

 Joining the NFA

 Registering employees with the NFA

 Documenting employee procedures (how will margin calls be handled, what reporting must be done and when, etc.)

 Contracting with an FCM (if the pool decides to do so)  Opening client accounts

Each of these steps can be quite complex, but all are important to the creation of a viable commodity pool operation.

SELECTING A CORPORATE STRUCTURE

A c o m m o d i t y p o o l n e e d s t o c r e a t e t w o o r m o r e b u s i n e s s e n t i t i e s .  T h e a c t u a l b u s i n e s s o w n e d b y t h e c o m m o d i t y p o o l o p e r a t o r s  E a c h p o o l o p e r a t e d m u s t b e a s e p a r a t e b u s i n e s s e n t i t y ( N F A r u l e ) Y o u r b u s i n e s s m u s t b e s e t u p i n s u c h a w a y t h a t t h e p o o l o p e r a t o r ’ s p e r s o n a l a s s e t s a r e s h i e l d e d ( a s m u c h a s p o s s i b l e ) f r o m a l a w s u i t f i l e d a g a i n s t y o u r f i r m . A d d i t i o n a l l y , t a x e s p l a y a v e r y i m p o r t a n t p a r t i n a n y d e c i s i o n s a r o u n d w h i c h c o r p o r a t e s t r u c t u r e t o u s e . T y p i c a l l y t h e t r a d i n g f i r m t h a t i s o p e r a t i n g t h e p o o l ( s ) i s s e t - u p a s o n e o f t h e f o l l o w i n g e n t i t i e s :  L i m i t e d P a r t n e r s h i p ( L L P )  L i m i t e d L i a b i l i t y C o m p a n y ( L L C )  C C o r p o r a t i o n  S u b c h a p t e r S C o r p o r a t i o n s H e r e i s a t a b l e p r o v i d i n g a n o v e r v i e w o f e a c h b u s i n e s s t y p e :

E n t i t y

C o n t r o l

L i a b i l i t y

T a x e s

L i m i t e d P a r t n e r s h i p ( L L P ) A g e n e r a l p a r t n e r c o n t r o l s t h e b u s i n e s s G e n e r a l p a r t n e r s a r e f u l l y l i a b l e f o r t h e b u s i n e s s e s a c t i o n s ; l i m i t e d p a r t n e r s h a v e l i a b i l i t y u p t o t h e a m o u n t o f t h e i r i n v e s t m e n t P a r t n e r s h i p f i l e s a n n u a l t a x r e t u r n s . A l l p a r t n e r s r e p o r t t h e i r i n c o m e o n t h e i r p e r s o n a l t a x r e t u r n . D e d u c t i o n s f o r l o s s e s m a y b e l i m i t e d

L i m i t e d L i a b i l i t y C o m p a n y ( L L C ) M e m b e r s o f a n L L C c a n d i r e c t l y p a r t i c i p a t e i n t h e f i r m ’ s m a n a g e m e n t o r t h e y c a n e l e c t a m a n a g e r t o r u n t h e c o m p a n y O w n e r s a r e l i a b l e f o r b u s i n e s s d e b t s u p t o t h e a m o u n t t h e y h a v e i n v e s t e d T a x t r e a t m e n t v a r i e s b y s t a t e C C o r p o r a t i o n S h a r e h o l d e r s a p p o i n t a b o a r d o f d i r e c t o r s w h i c h a p p o i n t s o f f i c e r s w h o r u n t h e c o m p a n y S h a r e h o l d e r s h a v e l i a b i l i t y u p t o t h e a m o u n t o f t h e i r i n v e s t m e n t C o m p a n y f i l e s i t s o w n t a x r e t u r n S u b c h a p t e r S S h a r e h o l d e r s a p p o i n t a b o a r d o f d i r e c t o r s w h i c h a p p o i n t s o f f i c e r s w h o r u n t h e c o m p a n y S h a r e h o l d e r s h a v e l i a b i l i t y u p t o t h e a m o u n t o f t h e i r i n v e s t m e n t S h a r e h o l d e r s r e p o r t t h e i r s h a r e o f t h e c o r p o r a t e p r o f i t s o r l o s s e s o n t h e i r p e r s o n a l t a x r e t u r n s D e t e r m i n i n g w h i c h c o r p o r a t e s t r u c t u r e t o u s e i s i m p o r t a n t a n d y o u s h o u l d c o n s u l t a n a t t o r n e y w h o i s f a m i l i a r w i t h t h e i s s u e s s u r r o u n d i n g t r a d i n g b u s i n e s s e s b e f o r e m a k i n g a d e c i s i o n . O n c e y o u h a v e s e t - u p t h e c o r p o r a t e s t r u c t u r e o f y o u r f i r m , y o u n e e d t o d e c i d e w h a t s t r u c t u r e t o u s e f o r t h e a c t u a l p o o l ( s ) . N F A r u l e s r e q u i r e t h a t e a c h p o o l b e a s e p a r a t e l e g a l e n t i t y . M a n a g e d f u t u r e s b u s i n e s s e s h a v e t r a d i t i o n a l l y s e t u p t h e p o o l s a s L L P s , L L C s o r C C o r p o r a t i o n s . H o w e v e r , t h e r e i s a r e c e n t t r e n d t o s e t t h e p o o l s u p a s t r u s t s . A g a i n , c o n s u l t a n a t t o r n e y t o h e l p y o u m a k e t h i s d e c i s i o n .

PLANNING YOUR BUSINESS

You need two documents to define how your trading business will be run: • A Trading Plan

• A Business Plan

You will need both a trading plan and a full business plan to get a loan or get an FCM to clear your business. The plans will also be reviewed by the NFA, so do not skip this step. A trading plan should include at least the following:

 How will you trade? Trend following? Spread trading? Scalping? Discretionary? Mechanical? Something else?

 What products will be traded?

 How will overnight trading be handled?  How will risk management be handled?

 How will trades be allocated to client accounts?  How will you clear trades?

A business plan for a commodity pool should include at least the following things:  What will your start up costs be?

 Do you have any intellectual property that needs legal protection?  What fees will be charged to your clients?

 How will customer orders be taken (phone, email, online entry screen)?  What expenses will the pool incur? Will the pool operator pay rent for office

space? What about fees for data providers and trading platforms? Clearing costs and brokerage also need to be estimated.

 How long do you expect to operate before turning a profit? Do you have the capital required to survive until the fees you are collecting cover your expenses?

 How will clerical work be handled (confirms, statements, regulatory filings, margin calls, trade reconciliation, etc.)?

 How will client redemptions be handled?

 Can clients transfer their ownership in the pool?

 Will the pool make periodic payments to the clients (capital gains distributions, dividends)?

 How will you market to prospective clients? How will marketing materials be checked for regulation violations before use?

 Will you conduct seminars, webinars, create a website, publish a newsletter, etc.?

 How will employees be educated and what is your plan for required ethics training?

A proper business plan will be divided into a number of sections including: • An Executive Summary

• Company description

• Customer analysis (who are your customers and how will you obtain new customers?)

• Management team

• Financial analysis (projected profits, cash flow, etc.)

Charging Fees:

There are three ways that the fees you charge your clients are typically arrived at: • Management Fees - the pool operator is paid a percentage of the assets under

management

• Incentive Fee - the pool operator is paid a percentage of net new trading profits • Commissions - payment is based on the commissions generated. This is a conflict

of interest concern and is rarely used today

Note that incentive fees are based on "new net" profits. This means that if you make $50,000 in profits and charge an incentive fee, and then you lose $10,000, followed by making a profit of $12,000, you would only be able to charge an incentive fee on $2,000 of the $12,000 profit since $10,000 of that $12,000 profit is the recovery of money you had charged for earlier.

Whatever fees you charge, you must fully disclose them to your clients. Be prepared to explain them clearly and in writing, and make sure your explanation appears in your customer disclosure document.

JOINING THE NFA

When you start a commodity pool, you are required to register with the NFA and the CFTC. There are a few exceptions to this requirement, but only very small pools qualify for them.

Registration with the NFA is the first requirement. The NFA will then ensure that the CFTC Is notified properly of your registration.

The following things must be done to register with the NFA:

• Complete the NFA registration documents electronically in their Online Registration System (ORS)

• Pay a non-refundable application fee of $200 • Pay membership dues of $750 for one year

• Determine who in your firm is required to have a Series 3 license and make arrangements for them to take the test

• Prepare a disclosure document that must be approved by the NFA before any funds can be accepted from clients

Online Registration

A document can be printed from the NFA website that lists all the questions the pool operator must answer in the ORS system. Once this form has been filled in, transfer the information on it into ORS.

The information you will be asked for by ORS for an individual application includes: • Personal information (name, address, Social Security number, etc.)

• Exchange affiliation (if the person registering owns a "seat" on an exchange) • Business mailing address

• Previous disciplinary or criminal disclosures • Employment and education history

• Residential history

• Proficiency requirements (have you passed the Series 3, 30 or 34 exams?

You also must have your fingerprints taken as part of your registration. This can be done at a bonding company, city hall, a securities exchange or at a police station. The NFA has a form that must be downloaded and used as part of the fingerprinting process.

The information you will be asked for by ORS for a firm application includes: • The business address

• Corporate structure (corporation, partnership, etc.) • Holding company and branch office information (if any) • Exchange affiliation (if any)

• Disciplinary information • Criminal disclosures

• Names and addresses of certain employees of the pool (compliance officer, arbitration contact, etc.)

Disclosure Documents

Preparing a disclosure document that the NFA accepts is critical, and difficult. You may want to consult an attorney to do it. The NFA's website contains a document called

"Disclosure Documents - a Guide for CPOs and CTAs" that provides detailed instructions on how to do this. Note that the document contains a large amount of text that must be cut and pasted into your disclosure document with no changes whatsoever.

Here is a high-level summary of what your disclosure document must contain: • Risk Disclosure (cut and paste)

• Table of Contents

• An introduction that includes basic information about your business (company name, address, telephone number, etc.)

• Identify the firm's principals by name and provide the business background of the principals

• The name of the firm's FCM or Introducing Broker

• Risks specific to the pool's trading strategy and a full description of that strategy

• All fees that will be charged to clients

• Any conflicts of interests that the principals may have

• Any material litigation that the firm or principals are involved in

• Previous performance of the pool (if the pool is new it must be clearly stated that there is no previous performance information and you will have to disclose the principal's personal trading performance)

• Client liability in the pool (can they lose more than their initial investment?) • How will the pool fulfill margin requirements?

• Break-even analysis

• The minimum and maximum subscriptions that the pool permits • What the pool's reporting requirements to the clients are

Once the disclosure document is written, it must be submitted to the NFA for approval. Use the NFA's Electronic Disclosure Document Filing System to do this. Expect a response in about 14 days. If there are any deficiencies in the document you will need to correct them and re-submit the disclosure to the NFA.

Once your disclosure document is approved you are not done with it. No document older than nine months can be given to a client. This means that you will need to update the disclosure statement periodically and re-submit it for approval. This is accomplished by sending two copies of the document to the NFA:

• One copy is completely "clean" (a normal document)

• The second copy must be marked up to show all deletions, additions and other changes

Other NFA Requirements:

Once you are registered there are on-going requirements you need to fulfill:

 You must appoint a "security officer" who will be responsible for controlling access to both internal computer systems (trading, accounting, etc.) and external systems (such as the NFA's system)

 You must designate a Compliance Officer who will review trading and account activity and oversee the firm's anti-money laundering program as well as interface with regulators and auditors

After you have completed your registration, the NFA will offer an "educational visit" where they will review reporting and record keeping, the audit process, etc. Take advantage of this offer, as it will help avoid problems later.

If you need to speak with an NFA representative at any time, the phone number is 800-621-3570. The NFA has a branch in New York City at 120 Broadway, Suite 1125, NY., NY 110271.

REGISTERING EMPLOYEES

C e r t a i n e m p l o y e e s n e e d t o b e r e g i s t e r e d w i t h t h e N F A : • A l l p r i n c i p a l s o f t h e p o o l • A s s o c i a t e d P e r s o n s - a n y o n e w h o r o u t i n e l y d e a l s w i t h c l i e n t s o r s o l i c i t s f u n d s f r o m t h e m A s p a r t o f t h e r e g i s t r a t i o n p r o c e s s t h e e m p l o y e e m u s t e i t h e r t a k e t h e c o r r e c t l i c e n s i n g e x a m o r t h e y m u s t s h o w t h a t t h e y h a v e a l r e a d y p a s s e d t h e r e q u i r e d l i c e n s i n g e x a m . L i c e n s i n g E x a m s T h e e x a m s t h a t m a y n e e d t o b e t a k e n a r e : • S e r i e s 3 – r e g i s t e r t o t a k e t h i s t e s t o n F I N R A ’ s w e b s i t e . T r a d e r s a n d p r i n c i p a l s o f t h e f i r m a r e r e q u i r e d t o p a s s t h i s e x a m • S e r i e s 3 1 F u t u r e s M a n a g e d F u n d s E x a m – t h i s t e s t i s t a k e n b y a n y o n e w h o l i m i t s t h e i r a c t i v i t y t o s o l i c i t i n g f u n d s f r o m c l i e n t s • S e r i e s 3 0 B r a n c h M a n a g e r E x a m – t h e b r a n c h m a n a g e r o f a p o o l m u s t p a s s t h i s e x a m P a s s i n g t h e S e r i e s 3 " c o v e r s " t h e r e q u i r e m e n t s o f t h e o t h e r e x a m s . T a k i n g t h e o t h e r e x a m s d o e s n o t e l i m i n a t e t h e n e e d t o t a k e t h e S e r i e s 3 i f i t w o u l d o t h e r w i s e b e r e q u i r e d .

A l s o , u n d e r N F A r u l e 2 - 9 a l l r e g i s t e r e d e m p l o y e e s a r e r e q u i r e d t o p e r i o d i c a l l y a t t e n d e t h i c s c l a s s e s a n d y o u m u s t h a v e a p l a n f o r t h i s i n t h e c o m p a n y ’ s e m p l o y e e m a n u a l .

DOCUMENTING EMPLOYEE PROCEDURES

C r e a t i n g a n e m p l o y e e p r o c e d u r e d o c u m e n t i s a g o o d i d e a i n g e n e r a l f o r y o u r b u s i n e s s . T h e d o c u m e n t i s a l s o s o m e t h i n g t h a t r e g u l a t o r s m a y d e m a n d t o s e e w h e n r e v i e w i n g y o u r o f f i c e p r o c e d u r e s f o r r u l e c o m p l i a n c e . T h i s d o c u m e n t s h o u l d i n c l u d e w r i t t e n p r o c e d u r e s f o r ( a m o n g o t h e r t h i n g s ) : • O p e n i n g n e w a c c o u n t s ( i n c l u d i n g " k n o w y o u r c l i e n t " a n d " a n t i - m o n e y l a u n d e r i n g " r u l e c o m p l i a n c e ) • U p d a t i n g t h e r i s k d i s c l o s u r e d o c u m e n t a n d p r o v i d i n g i t t o c l i e n t s • H a n d l i n g m a r g i n c a l l s • H a n d l i n g c l i e n t m o n e y ( s e g r e g a t i o n o f f u n d s , e t c . ) • D e a l i n g w i t h c l e a r i n g h o u s e b r e a k s , e t c . • D e l i v e r i n g s t a t e m e n t s a n d c o n f i r m s t o c l i e n t s • P r o c e s s i n g c u s t o m e r r e d e m p t i o n s • T r a c k i n g p e r f o r m a n c e , w h i c h m u s t b e i n c l u d e d i n c u s t o m e r a n d c o m p l i a n c e r e p o r t i n g , a s w e l l a s i n u p d a t e d v e r s i o n s o f t h e d i s c l o s u r e d o c u m e n t • C o m p l y i n g w i t h a l l r e g u l a t i o n s ( p r e v e n t i n g a c c o u n t " c h u r n i n g " , e t c . ) T h e p o o l o p e r a t o r s m a y c o n t r a c t w i t h a t h i r d p a r t y ( a n F C M f o r e x a m p l e ) t o h a n d l e s o m e o f t h i s , b u t t h e p r o c e d u r e m a n u a l t h e n

w o u l d n e e d t o d e t a i l h o w t h e p o o l w i l l w o r k w i t h t h e F C M t o s a t i s f y t h e s e r e q u i r e m e n t s .

CONTRACTING WITH AN FCM

C h o o s i n g a n F C M i s o n e o f t h e m o s t i m p o r t a n t d e c i s i o n s a p o o l o p e r a t o r w i l l m a k e . N o t o n l y d o y o u n e e d t o b e c o m f o r t a b l e w o r k i n g w i t h t h e p e o p l e i n y o u r F C M , b u t y o u m u s t a l s o b e c o m f o r t a b l e w i t h t h e i r f i n a n c e s . P o o l o p e r a t o r s t h a t d i d b u s i n e s s w i t h M F G l o b a l r e p o r t t h a t t h e y l o s t f r o m t e n t o f i f t y p e r c e n t o f t h e i r c u s t o m e r s a s a r e s u l t o f t h e e v e n t s s u r r o u n d i n g t h a t F C M ’ s f a i l u r e . T h e N F A n o w p o s t s c e r t a i n f i n a n c i a l i n f o r m a t i o n a b o u t F C M s o n t h e i r w e b s i t e a n d t h i s i n f o r m a t i o n s h o u l d b e r e f e r r e d t o b y t h e p o o l o p e r a t o r . F C M s w i l l d o m u c h o f t h e r e g u l a t o r y r e p o r t i n g , s e n d o u t c u s t o m e r c o n f i r m s a n d s t a t e m e n t s , h a n d l e m a r g i n c a l l s a n d f u n d s s e g r e g a t i o n a n d c l e a r t h e p o o l ' s t r a d e s , a m o n g o t h e r t h i n g s . F e e s c h a r g e d b y t h e F C M a r e n e g o t i a b l e a n d m a y d e p e n d o n t h i n g s s u c h a s : • t h e p r o d u c t s a n d e x c h a n g e s t h e p o o l t r a d e s • h o w m a n y t r a d e s t h e p o o l d o e s o v e r a c e r t a i n p e r i o d o f t i m e • i f y o u h a v e a l e s s t h a n c l e a n r e g u l a t o r y r e c o r d , e x p e c t t h e F C M t o c h a r g e m o r e , i f t h e y w i l l e v e n a c c e p t y o u r b u s i n e s s . S o m e F C M s m i g h t r e q u i r e t h a t y o u u s e t h e i r t r a d i n g p l a t f o r m o r t h a t y o u p o s t a s e c u r i t y d e p o s i t b e f o r e t r a d i n g s t a r t s . M a k e s u r e t h a t e v e r y t h i n g i s s p e l l e d o u t i n t h e c o n t r a c t t h e y o f f e r .

OPENING CLIENT ACCOUNTS

T h e r e a r e a l a r g e n u m b e r o f r e g u l a t i o n s t h a t m u s t b e c o m p l i e d w i t h w h e n o p e n i n g c u s t o m e r a c c o u n t s :  P r o v i d e a n N F A a p p r o v e d d i s c l o s u r e d o c u m e n t t o e a c h a c c o u n t h o l d e r b e f o r e t h e y a c t u a l l y o p e n t h e a c c o u n t ( a n d h a v e t h e c l i e n t s i g n a d o c u m e n t s t a t i n g t h a t t h e y r e c e i v e d t h e d i s c l o s u r e d o c u m e n t )  O b t a i n t h e c l i e n t ' s t r u e n a m e , a d d r e s s , a n d o c c u p a t i o n a s w e l l a s t h e n a m e o f t h e c u s t o m e r ' s e m p l o y e r  R e c o r d t h e c u s t o m e r ' s m a r i t a l s t a t u s a n d t h e n u m b e r o f d e p e n d e n t s t h e y h a v e  O b t a i n t h e c l i e n t ' s i n c o m e , l i q u i d n e t w o r t h a n d f u l l n e t w o r t h  R e c o r d t h e a g e o f a n i n d i v i d u a l c l i e n t  G e t d e t a i l s o f t h e c u s t o m e r ' s p r e v i o u s f u t u r e s t r a d i n g e x p e r i e n c e  A s k t h e c u s t o m e r i f t h e a c c o u n t i s f o r s p e c u l a t i v e o r h e d g i n g p u r p o s e s a n d d e t e r m i n e w h a t t h e c u s t o m e r ' s r i s k t o l e r a n c e i s  H a v e t h e c l i e n t s i g n a n y r e q u i r e d p o w e r s o f a t t o r n e y o r d i s c r e t i o n a r y t r a d i n g a u t h o r i z a t i o n s V e r b a l l y o b t a i n e d i n f o r m a t i o n m u s t b e s e n t t o t h e c l i e n t f o r t h e m t o r e v i e w f o r a c c u r a c y . I f t h e c l i e n t p r o v i d e s t h e i n f o r m a t i o n i n w r i t i n g , i t d o e s n o t n e e d t o b e s e n t b a c k t o t h e c l i e n t f o r r e v i e w . A p r i n c i p a l , b r a n c h m a n a g e r o r o t h e r d e s i g n a t e d e m p l o y e e m u s t r e v i e w a l l a c c o u n t a p p l i c a t i o n s t o d e c i d e i f t h e a c c o u n t w i l l b e p e r m i t t e d t o b e g i n t r a d i n g . K e e p i n m i n d t h a t a l l t r a n s a c t i o n s r e c o m m e n d e d b y t h e p o o l o r e x e c u t e d b y t h e p o o l ' s t r a d e r s m u s t b e a p p r o p r i a t e f o r t h a t p a r t i c u l a r c l i e n t . A l s o , t h e p o o l o p e r a t o r m u s t b e r e a s o n a b l y s u r e

t h a t t h e c l i e n t u n d e r s t a n d s t h e r i s k s a n d i s f i n a n c i a l l y c a p a b l e o f w i t h s t a n d i n g t h e r i s k s . T h e p o o l m a y a l s o w a n t t o e s t a b l i s h a m i n i m u m s i z e f o r a n e w a c c o u n t . A l s o r e m e m b e r t h a t t h e p o o l o p e r a t o r m u s t p r o v i d e t h e f o l l o w i n g r e p o r t s t o i n v e s t o r s e a c h q u a r t e r : • T h e f u n d ' s N e t A s s e t V a l u e ( N A V ) a t t h e e n d o f t h e q u a r t e r • T h e c h a n g e i n v a l u e o f t h e N A V f r o m t h e l a s t q u a r t e r • T h e v a l u e o f t h e i n v e s t o r ' s i n t e r e s t i n t h e p o o l a t q u a r t e r e n d A n n u a l r e p o r t s m u s t b e p r o v i d e d t o e a c h c u s t o m e r .

AUDIT REQUIREMENTS

Y o u s h o u l d e x p e c t t o b e a u d i t e d b y t h e N F A a t l e a s t o n c e e v e r y t h r e e y e a r s . Y o u r f i r s t a u d i t w i l l b e d o n e v e r y s o o n a f t e r y o u o p e n f o r b u s i n e s s . T h e a u d i t h a s t w o p r i m a r y g o a l s : • E n s u r e t h a t t h e p o o l i s k e e p i n g p r o p e r r e c o r d s t h a t c o m p l y w i t h C F T C a n d N F A r u l e s • V e r i f y t h a t y o u r b u s i n e s s i s b e i n g r u n i n a n h o n e s t w a y a n d t h a t c l i e n t s a r e p r o t e c t e d f r o m f r a u d N o t e t h a t t h e N F A m a y a u d i t y o u r F C M r a t h e r t h a n a u d i t i n g t h e p o o l d i r e c t l y . B u t y o u w i l l s t i l l n e e d t o u n d e r s t a n d t h e a u d i t p r o c e s s a n d b e a b l e t o p r o v i d e a n y i n f o r m a t i o n t h e a u d i t o r s r e q u e s t . I n p r e p a r a t i o n f o r a n N F A a u d i t y o u s h o u l d m a k e s u r e t h a t y o u r p o l i c y a n d p r o c e d u r e s m a n u a l i s u p - t o - d a t e a s i t w i l l b e r e v i e w e d ,

a s w i l l y o u r c o m p l i a n c e m a n u a l , y o u r s a l e s p r a c t i c e s m a n u a l , a n d y o u r a n t i - m o n e y l a u n d e r i n g p o l i c y . T h e a u d i t w i l l f o c u s o n t h e f o l l o w i n g t h i n g s : • G e n e r a l i n f o r m a t i o n - r e g i s t r a t i o n q u e s t i o n s a n d v e r i f i c a t i o n t h a t y o u a r e n o t d o i n g b u s i n e s s w i t h p e o p l e / f i r m s t h a t a r e n o t r e g i s t e r e d w i t h t h e N F A , b u t s h o u l d b e • D i s c l o s u r e d o c u m e n t s • C o m p a n y r e c o r d s • C u s t o m e r c o m p l a i n t s a n d a d v e r t i s i n g • F e e s a n d b l o c k o r d e r a l l o c a t i o n • P e r f o r m a n c e r e c o r d t e s t i n g A l s o , t h e N F A w i l l s e n d a " S e l f - E x a m i n a t i o n " d o c u m e n t t o y o u e a c h y e a r . T h i s d o c u m e n t m u s t b e a n s w e r e d i n w r i t i n g a n d a n y d e f i c i e n c i e s u n c o v e r e d m u s t b e a d d r e s s e d a s q u i c k l y a s p o s s i b l e .

CONCLUSIONS

S e t t i n g u p a n y b u s i n e s s r e q u i r e s p l a n n i n g a n d a t t e n t i o n t o d e t a i l . T h i s i s e s p e c i a l l y t r u e f o r b u s i n e s s e s b e i n g s t a r t e d i n a h i g h l y r e g u l a t e d i n d u s t r y s u c h a s f u t u r e s t r a d i n g . R e m e m b e r t o u s e l e g a l h e l p w h e r e n e c e s s a r y a n d c o n s u l t w i t h t h e r e g u l a t o r s w h e n e v e r y o u a r e u n s u r e a b o u t h o w t o p r o c e e d . O n c e y o u h a v e s t a r t e d t h e b u s i n e s s a n d r e g i s t e r e d i t w i t h t h e N F A , i t i s t i m e t o c o n f r o n t t h e m a r k e t p l a c e a n d d e l i v e r r e a l v a l u e t o y o u r c l i e n t s !

About ASJ International, Inc.

ASJ International, Inc. is a financial services consulting firm that helps financial services companies with their order routing and data warehousing projects. We specialize in helping to reduce trading expenses and have been part of projects that have saved hundreds of millions of dollars in clearing, exchange and brokerage fees at several large investment banks.

We also write business and technical specifications for information technology projects, provide project management services and design and conduct classes for the employees of financial services firms. We have extensive knowledge of futures, options and equity trading.

ASJ International, Inc. 32-1 Bergen Ridge Rd. North Bergen, NJ. 07047

[email protected] www.asjinternational.com

ASJ International, Inc.

32 Bergen Ridge Rd., Suite 1, North Bergen, NJ. 07047 [email protected]

www.asjinternational.com 201-724-9839