The Investment Adviser Association has told the Securities and Exchange Commission to apply consistent standards and a concise format in deficiency letters. These letters routinely fail to explain precisely which legal principles were allegedly violated and what remedial measures the firm should undertake, the IAA stated in a letter to Lori Richards, director of the SEC’s Office of Compliance Inspections and Examinations. The IAA is requesting that “OCIE states specifically what the deficiency is and how the adviser violated it,” said David Tittsworth, executive director of the IAA in Washington, D.C. Some letters engage in lengthy recitations of the law or reference legal principles that are not related to exam findings. OCIE must focus on citing only those legal principles which are related to violations committed by the firm, the March 29 letter stated. The IAA had discussed deficiency letters with the SEC over the past year, said Tittsworth.
Language used in them is sometimes disproportionate to the seriousness of the violations uncovered in the exams, the IAA stated. Some letters describe minor infractions as a “serious risk to the firm,” while others make no such conclusions. OCIE must guard against using its subjective judgment it its deficiency letters. “We submit that the best way to enhance the consistency and clarity of deficiency letters is to remove the subjectivity from the conclusions...and adhere to the facts and the law,” the IAA stated.
OCIE is examining the language it uses to characterize firms in its deficiency letters,
John Walsh, chief counsel in OCIE, told a chief compliance officer forum last month (CR, 3/20). Last year, Richards said OCIE was looking to standardize the deficiency letter format because it has varied and to ensure that the letters are clear about the violations (CR, 10/28). Richards was traveling and referred calls to John Nester, SEC spokesman. He confirmed the SEC received the IAA letter. “The OCIE staff is considering the IAA’s suggestions in response to our initiative to ensure the language used in deficiency letters outlines the deficiencies found in a clear and consistent manner,” Nester said.