Deficiency Letter

What Is a Deficiency Letter?

A deficiency letter is a letter issued by the Securities and Exchange Commission (SEC) and indicates a significant deficiency or omission in a registration statement 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 Examination 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 omission in a registration statement or prospectus.
  • A deficiency letter is typically sent to registrants of intended 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.
  • The letter will often halt the registration process and, thus, postpone the date of the issue.
  • A stop order may be issued along with the deficiency letter 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 intended 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 letter should be dealt with promptly, and the SEC should be alerted of any actions taken to remedy the situation.

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

Understanding a Deficiency Letter

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

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

Types of Deficiencies

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

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

Many advisers do not realize that they are failing to meet regulatory compliance requirements 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 understand that they hold custody of that account and must meet the requirements of the Custody Rule, including being open to surprise examinations from the SEC. Advisers often meet regulations to some extent but fall short of full compliance. Because regulations are so complex, the SEC typically allows advisers a reasonable amount of time to address deficiencies.

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  1. U.S. Securities and Exchange Commission. "Compliance Examination Deficiency Letter Process." Accessed Sept. 27, 2021.

  2. U.S. Securities and Exchange Commission. "The Five Most Frequent Compliance Topics Identified in OCIE Examinations of Investment Advisers," Page 2. Accessed Sept. 27, 2021.