The Securities and Exchange Commission issued a new ComplianceAlert letter identifying common deficiencies and weaknesses that SEC examiners found during compliance examinations of firms registered with the SEC.
With respect to broker-dealer firms, the SEC staff examined and observed, in part, the following practices and procedures:
- Securities firms which provided “free lunch” sales seminars used misleading advertisements in order to encourage attendance. For example, the seminar would be advertised as “educational” but the intent of the seminar was to induce attendees to open new accounts with the sponsoring firm and to purchase investment products that were discussed at the seminar. Moreover, many of the broker-dealer firms did not submit their sales material to the Financial Industry Regulatory Authority (FINRA) for review, as required by National Association of Securities Dealers advertising rules. The SEC recommends that financial services firms should take steps to supervise sales seminars more closely and to specifically review and approve all advertisements and sales materials in order to ensure accuracy.
- Large broker-dealer firms were examined to assess their valuation and collateral management practices with respect to subprime mortgage-related products, with an emphasis on the controls surrounding the valuation process. Specifically, the SEC monitored the verification by independent personnel of the valuations assigned by trading personnel, a practice called “product control.” Examiners found that firms were having difficulty verifying their inventory valuations due to market illiquidity and because the product control groups were insufficiently staffed and insufficiently experienced. Thus, firms have become more reliant on modeled prices as opposed to independent third party pricing services.
- Large broker-dealer firms that had designated their registered representatives as “solicitors” for an investment adviser were examined and were found to have insufficient supervisory controls and had not established or enforced adequate written procedures to supervise solicitor activity. Some of these broker-dealer firms used seemingly false or misleading advertising and sales literature and also failed to file such materials with FINRA.