SEC STAFF ISSUES COMPLIANCE ALERT TO ADVISERS, FUNDS, BDs
The SEC Staff released a new “ComplianceAlert” detailing compliance deficiencies at advisers, funds, and broker-dealers uncovered during compliance examinations. The most significant findings: (1) Code of Ethics: Firms often failed to follow their Codes of Ethics by ignoring the reporting and monitoring requirements; (2) Proxy Voting: Firms failed to properly oversee third party proxy voting services to ensure that proxies were voted consistently with fund policies; (3) High Yield Securities: Firms often failed to properly disclose increased holdings of illiquid securities and the lack of independent pricing; (4) Soft Dollars: The SEC Staff expressed concern about the accumulation of large soft dollar credit balances and whether firms accepted cash rebates to pay down the balances; (5) Free Lunch Seminars: Firms often used misleading sales material that over-stated safety, liquidity, and rates of return; (6) Valuation of Collateral: Many broker-dealers failed to have adequate processes to properly value illiquid securities held in inventory or as collateral; and (7) Insurance-Affiliated Broker-Dealers: The SEC Staff noted a general lack of appropriate compliance policies and procedures.
OUR TAKE: These “ComplianceAlerts” serve as warning shots by the SEC staff that they will be closely examining these areas during upcoming reviews. Firms that fall short will not have the ignorance defense against a possible deficiency or enforcement action. Compliance officers should take action with respect to every item applicable to their firms.