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Deficiency Letter Definition

What Is a Deficiency Verbatim?

A deficiency letter is a letter issued by the Securities and Exchange Commission (SEC) and indicates a significant deficiency or omission in a registration annunciation or prospectus. A deficiency letter is issued after an examination by the Office of Compliance Inspections and Examinations (OCIE), an agency of the SEC, which administrates the Compliance Inspection Program.

Key Takeaways

  • A deficiency letter is a letter that is issued by the Securities and Exchange Commission (SEC) and indicates a significant deficiency or deletion in a registration statement or prospectus.
  • A deficiency letter is typically sent to registrants of intended public stock offerings, but in the occasion of an SEC examination, a deficiency letter may indicate deficiencies in an investment adviser’s regulatory compliance program.
  • The letter will on numerous occasions halt the registration process and, thus, postpone the date of the issue.
  • A stop order may be issued along with the deficiency word for word that will prevent any sale of the securities in the issue until the deficiency is handled.

A deficiency letter is typically sent to registrants of aim public stock offerings, but in the case of an SEC examination, a deficiency letter may indicate deficiencies in an investment adviser’s regulatory compliance program. A deficiency epistle should be dealt with promptly, and the SEC should be alerted of any actions taken to remedy the situation.

A deficiency letter is also recollected as a letter of comment or a letter of comments.

Understanding a Deficiency Letter

When issuing securities, a deficiency letter intention usually disrupt the process. The letter will often halt the registration process and, thus, postpone the date of the cause clebre. This prevents a company from receiving funds at an expected date. Furthermore, a stop order may be issued along with the deficiency learning. This will prevent any sale of the securities in the issue until the deficiency is handled.

When an investment adviser notified ofs a deficiency letter regarding regulatory compliance deficiencies, they will need to address the letter by improving their regulatory compliance program in the ways recommended by the letter. All SEC-regulated investment advisers must undergo periodic SEC examinations. Frequently, deficiency letters are issued consolidate an SEC examination. Usually, they are intended to highlight flaws in the adviser’s regulatory compliance or areas for improvement in their solid, rather than to call out unethical behavior.

Types of Deficiencies

Most deficiencies are minor, such as in the case of weakness to maintain adequate advertising records or maintaining an inadequate business-continuity plan. Some common compliance deficiencies encompass:

  • Failure to perform regular annual compliance policies and procedures, their implementation, and their effectiveness in the firm
  • Lemon to amend form ADV at least once a year, or more often if required by the Form ADV instructions
  • Failure to file a Show up PF
  • Failure to meet the requirements of the Custody Rule

Many advisers do not realize that they are failing to meet regulatory compliance requisites because they do not understand how regulations apply to their situations. For example, an adviser who has online access to a client’s account may not accept that they hold custody of that account and must meet the requirements of the Custody Rule, including being unblocked to surprise examinations from the SEC. Advisers often meet regulations to some extent but fall short of full compliance. Because usuals are so complex, the SEC typically allows advisers a reasonable amount of time to address deficiencies.

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