On Jan 11, the U.S. Securities and Exchange Commission (SEC) released the Office of Compliance Inspections and Examinations’ (OCIE) priorities for 2016. Listen back as MyComplianceOffice and expert professional, Patrick J Burns of Advanced Regulatory Compliance (ARC) share how CCOs can prepare for deficencies letters.
I think it makes sense to prepare for a deficiency letter. Deficiency letters typically stem from the compliance policies and procedures not being up to date. One of the things that I think can take place to really mitigate a serious deficiency letter is, if things come up during the examination, sometimes, if you fix them onsite, if it's a quick fix, it may not even make its way into the deficiency letter in the first place.
If it does make its way into the deficiency letter and you fixed something onsite, I still think it's helpful to do that because it generally will be a less serious deficiency letter and the SEC will acknowledge that you've already corrected the issue. I think it just sets the tone for the overall letter that you'll be receiving at the conclusion of the exam. It demonstrates that your firms cares and takes quick action when issues are brought to their attention.
Now, I think it makes sense not to wait until your scheduled annual review to address any deficiency items. Responses to the deficiency letter should be turned in to the examiners by the deadline. If you can't meet the deadline, I think it makes sense to ask for an extension. It's kind of a work of art on when you ask for the extension. It depends on what the issues are and the reasonableness of the response time.
What to do if you can't deliver information requested in time for an SEC deficiences letter?
If you got a deficiency letter asking for a mountain of information and they give you a 2-week response time, I certainly think it makes sense to pick up the phone and call the SEC and tell them that you need 30 days. You've just had some downtime probably dealing with the SEC and having them onsite. You've now got some accumulated work that needs to be attended to at your firm. In the whole scheme of things, you have some other things that need to be attended to.
As long as you get back to the SEC and you're reasonable in your request for an extension, generally, the first time around, they'll grant it without too much difficulty. If you come back and ask a second or a third time, they're going to want to ask why it is that you can't produce that information, and you'll need to have a better set of answers.
I would say, again, don't wait until your annual review to address deficiencies. I think deficiencies that are noted need to be dealt with as soon as possible. Another reason why they need to be dealt with real quickly is the SEC takes action against firms that are recidivists. If you have the same deficiency that comes up on a second exam or a third exam and you've already got knowledge from a previous exam that you have an issue in a certain area, the SEC really gets all over repeat issues. If you've been cited once on something and you haven't taken any action as a result of the first SEC letter to address the issue, that's where the serious consequences can start to come in from SEC enforcement and the examinations area.
"If things come up during the examination, sometimes, if you fix them onsite, if it's a quick fix the SEC will acknowledge that you've already corrected the issue."
"Responses to the deficiency letter should be turned in to the examiners by the deadline. If you can't meet the deadline, it makes sense to ask for an extension."
"Don't wait until your annual review to address deficiencies. I think deficiencies that are noted need to be dealt with as soon as possible"