Deficiency Letter Definition
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 What is a Deficiency Letter
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
Academic Research on Deficiency Letter
- · Accounting and the Law, Berle, A. A. (1938). The Accounting Review, 13(1), 9-15. This paper asserts a need for a more evolved system of accounting rules. The author suggests that many accounting rules, but not all, are already accepted as industry standards in the courts. By identifying those rules that needed codifying, and entering them into law, the accounting profession as a whole would benefit.
- · Developments in Business Financing, Garrett Jr, R. (1959). Bus. Law, 15, 972. This paper discusses some of the more current developments in the accounting and securities environment at the time (1959). Among the topics discussed are changes in the assessment of deferred taxes and accelerated depreciation.
- · Do financing constraints explain why investment is correlated with cash flow?, Kaplan, S. N., & Zingales, L. (1995). (No. w5267). National Bureau of Economic Research. This paper examines 49 low-dividend firms to find out if a firm’s cash flow-sensitivity has a relationship with its ability to secure investment capital. The results show that a higher sensitivity to cash flow does not necessarily correlate with increased financial constraints. The reasons are discussed and evidence is provided to back up their claims and challenge the conventional wisdom.
- · Corporate-government interplay: the era of industrial aid finance, Apilado, V. P. (1971). Urban Affairs Quarterly, 7(2), 219-241. This paper examines industrial aid bonds as they are used by state and local governments as incentives to firms to locate their operations within their borders.
- · Jurisdiction of the United States Board of Tax Appeals under the Revenue Act of 1926, Latham, D. (1927). California Law Review, 199-226. This article discusses the creation and rulings of the U.S. Board of Tax Appeals in its first few years of existence. Prior to the Board’s creation, the final word in tax issues rested solely with the Commissioner of Internal Revenue.
- · The Effect of Waivers in Federal Income Tax Cases, Emmanuel, M. G. (1950). U. Fla. L. Rev., 3, 176.
- · The ADR: An Instrument of International Finance and a Tool of Arbitrage, Moxley, R. E. (1963). Vill. L. Rev., 8, 19. This article deals with the practice of residents from one country buying and holding the securities of another country, and how it affects exchange rates, balances of payments, and international commerce. Some of the initial problems from this practice are addressed, as are the solutions that arose to deal with them.
- · Debtor’s Defense To A Deficiency Judgment Under UCC, Hutton, G. C. (1974). Pepperdine Law Review, 1(1), 10. This article deals with the appeal of a debtor against a deficiency judgement in California before the 3rd Appellate District in 1972. The author walks through the case, arguments, and the rulings in the case of Atlas Thrift Co. VS Horan. Matters of debt, lending, and contracts before the Uniform Commercial Code are discussed.
- · Acceleration under the Securities Act of 1933-a Comment on the ABA’s Legislative Proposal, Gadsby, E. N., & Garrett Jr, R. (1957). Bus. Law., 13, 718. In 1933, a legislative measure regarding the power of the S.E.C. was proposed in Washington, and the American Bar Association (ABA) adopted a resolution in favor of this proposal. This article outlines the authors’ beliefs as to why this proposal by the ABA was unwise.