Dear Members of the National Futures Association,
As we begin 2014, we have an opportunity to reflect and take account of where we have been, where we are, and where we are going. NFA has embraced its newly expanded responsibilities entrusted by Congress, the Commodity Futures Trading Commission (CFTC), and NFA Members and strives to fulfill these responsibilities with the full vigor and dedication of our staff.
We would like to begin by acknowledging that as a result of the changes in the exemption rules set forth by the CFTC, along with the continuing implementation of the Dodd-Frank Wall Street Reform Act, we have gained many new Members. Therefore, we would like to simply begin by saying, "Welcome," to our newest Members. Due largely to the influx of new commodity pool operator registrants, the number of NFA Members has grown 16% in the past year. This dramatic increase in our membership has substantially increased the number of pools operated by NFA Members from approximately 1,400 pools in recent years to approximately 5,700 pools in 2013. The net asset value of these pools also rose from about $350 billion to about $2.4 trillion.
The poet T. S. Eliot wrote in “Four Quartets”: “For last year’s words belong to last year’s language/And next year’s words await another voice.” While we at NFA have high principles and attributes that transcend the years, it seems an appropriate thought—"Welcome to 'next year'.” We are grateful for our successes over the last years and yet we accept our imperfections with a commitment and determination to excel at our tasks. And, with new authority comes a renewed sense of commitment to excellence.
As we are all well aware, the last two years have been the most challenging for the futures industry in the almost 80 years the two of us, collectively, have been in the business. The collapse of MF Global and the uncovering of the Peregrine Financial Group (PFG) fraud brought about the questioning of systems and procedures believed to be safe and beyond reproach. Our industry has prided itself on a long track record of protecting customer funds, and on our weathering the 2008 financial crisis. Now, this hard-earned, previously impeccable reputation for safeguarding customer funds was suddenly badly tarnished. We have now embarked down the long, hard road of rebuilding trust.
NFA approached the issues revealed by MF Global and PFG on two parallel paths: regulatory enhancements achieved by rule modifications and improved processes at NFA. Allow us to describe some of these improvements.
Shortly after the discovery of the PFG fraud, we formed a special committee made up of NFA's public directors, chaired by Dr. Todd Petzel. The Board directed the committee to be independent, thorough, and timely in its review of the circumstances surrounding the PFG fraud and all of the NFA audit practices and procedures. The committee engaged Berkeley Research Group (BRG) to gather the information and to analyze processes. The BRG team included former Securities and Exchange Commission (SEC) personnel who conducted a review of the SEC's practices in light of the Madoff scandal. During its investigation, BRG conducted a comprehensive review of NFA's exams of PFG from 1995 through 2012. BRG examined more than 190,000 NFA documents containing over 3 million pages, and more than 166,000 emails and related attachments. It conducted 32 separate interviews of individuals with knowledge of the factors or circumstances surrounding NFA's audits of PFG, including PFG’s former CEO Russell Wasendorf, Sr., who was in a federal correctional facility at the time of his interview. NFA is lucky to have outstanding public directors and we should all be grateful for their work on this committee.
The Committee and BRG submitted its findings in a report to NFA's Board of Directors in January 2013, which the Board then made available to the public on NFA's website. Although BRG's review found that "NFA audits were conducted in a competent fashion and the auditors dutifully implemented the appropriate modules that were required," it also stated that NFA needed to develop a greater sense of professional skepticism in its examinations, and it put forth a list of 20 recommendations designed to achieve that result. In addition to adopting the report in its entirety and making the report public, NFA's Board appointed an Implementation Special Committee to ensure those recommendations were fully implemented in a timely fashion. Organizational change is uncomfortable so our appreciation goes out to the Implementation Special Committee chaired by independent director Ron Filler, and comprised of Maureen Downs and Gerald Corcoran, as well as to the NFA staff.