The Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) issued its first “Compliance Alert” setting forth deficiencies and weaknesses in compliance and supervisory controls identified from recent inspections.
OCIE highlighted the following six areas for broker-dealers: Sales of Section 529 College Savings Plans; Sales of Collateralized Mortgage Obligations; Sales of Real Estate Investment Trusts; Supervisory Procedures to Ensure Compliance with Regulation SHO; Charges in Separately Managed Accounts; Part-Time Financial and Operational Principals; and Expense Sharing Arrangements.
OCIE identified the same core issues with respect to each of these areas. According to OCIE, many firms appeared to lack adequate written supervisory procedures or supervisory processes, and the examiners found indications of inadequate and potentially misleading disclosures to investors concerning the risk of the investments. Examples include not providing investors with NASD-required educational materials, presenting sales literature to investors that appeared to be unbalanced and misleading concerning the risks and yields of the securities, and the selling of the most complex and riskiest classes of securities to retail customers.
OCIE identified issues in the following four areas in the case of investment advisors and mutual funds: Closed-End Fund Distributions; Performance Advertising Deficiencies; Mutual Funds “As-Of” Transaction Practices; and Advisors’ Disaster Recovery Plans. OCIE identified misleading information as the key compliance concern with respect to the first three areas.