A new risk alert from the Securities and Exchange Commission (SEC) highlighted common deficiencies and weaknesses in the compliance programs of security-based swap dealers (SBSDs).
The alert, published Wednesday, identified issues in SEC examinations of SBSDs and provided observations about the practices of some dealers that might help other firms strengthen their compliance programs.
SBSDs were required to register with the SEC beginning in October 2021, part of the overhaul of the financial services industry contained in the Dodd-Frank Act. The SEC’s examinations of those dealers that registered with the agency began in 2022.
Common deficiencies and weaknesses found by SEC examiners included a lack of adequate policies and procedures, insufficient internal controls over regulatory reporting, and inadequate supervision of employees. In some cases, SBSDs failed to maintain complete and accurate books and records, the alert said. The SEC also found some SBSDs failed to establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the risks associated with their security-based swap activities.
Deficiencies observed regarding the reporting of accurate and timely security-based swap data and secondary trade information “were the result of weak internal controls and processes for ensuring that information reported was accurate,” the alert said. “In addition, examinations of security-based swap dealers revealed that certain security-based swap dealers did not employ procedures that were reasonably designed to identify and correct the trade reporting errors noted.”
The alert noted some firms failed to adequately identify and address potential conflicts of interest or establish an (at least) annual review of the firm’s security-based swap business.
Other SBSDs didn’t have an independent auditor perform periodic audits of security-based swap trading relationship documentation policies and procedures, retain the required record of a senior officer’s written approval of security-based swap trading relationship documentation policies and procedures, or complete written documentation of portfolio reconciliation with counterparties.