Despite the best efforts of broker-dealers and investment advisers to fully comply with all relevant rules, there are times when NASD or SEC examiners find deficiencies during an examination. This is not surprising, given the increasing complexity of securities regulation and current harsh political climate. The manner in which a firm responds to a notice of deficiencies is critical. This article describes the regulatory decisionmaking process and effective responses to such a notice.
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Broker-dealers and associated persons regulated by the NASD may receive Wells notices following the conclusion of an examination. In 1972, the SEC articulated its policy of issuing Wells notices, under which the staff advises persons and entities that it intends to recommend instituting enforcement proceedings against them. See Securities Act Release No. 5310 (1972) (“Wells Release”). Among other things, an SEC Wells notice typically advises recipients of the legal and factual bases of the charges, and invites them to make a written submission (Wells submission) presenting any defenses and explanations that may apply. Responses to these notices, commonly known as “Wells submissions,” are a critical component of any defense strategy. Such submissions may argue that no enforcement action is warranted, or that the staff should pursue lesser charges and more lenient relief than that proposed in the notice. Importantly, Wells submissions accompany the staff’s enforcement recommendations that are presented to the five SEC Commissioners.
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