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Deficiency Letter Explained

Deficiency Letter Explained

The Securities and Exchange Commission (SEC) of the United States issues deficiency letters to the registrants of intended public stock offerings when there is some major lapse or mistake in a filing, especially a prospectus.

A Little More on Deficiency Letters

A deficiency letter is issued by the SEC to notify the concerned company that the registration statement doesn’t comply with the mandatory federal disclosures. This letter recommends making amendments in the filing in order to get it approved.

The company is expected to address the issues immediately after receiving the letter and notify the SEC of any action taken. The letter disrupts the process of registration, and the date of the prospective issuance gets delayed.

The company doesn’t receive the funds on the stipulated date. Deficiency letters often come with a stop order notice. In such cases, new issues are stopped until the matter gets clearance.

Deficiency Letters to Investment Advisors

Investment advisers receive a deficiency letter from the SEC when his or her regulatory compliance program needs improvement to meet the applicable legal standards. All SEC-regulated investment advisers need to go through SEC examination at specific intervals. This is to ensure that their regulatory compliance programs do not have any deficiencies. About 80% of the time, the SEC issues a deficiency letter after the examination. It is generally to address issues in the regulatory compliance and not for immoral practices. Generally, the deficiency is a minor error.

Notably, investment advisors are required to complete and file forms ADV and PF with the SEC and state regulators. If the advisor fails to amend the form ADV or form PF annually (or more frequently as instructed), she will receive a deficiency letter.

Compliance policies and procedures need to be performed regularly by the firm. Maintaining adequate advertising records and a business continuity plan is also important in order to avoid a deficiency letter.

References for Deficiency Letter


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