SEC warns firms what will get them shortlisted for examination

Firms that have had recent leadership changes or large numbers of staff with disciplinary histories could soon find themselves on the SEC's shortlist for regulatory examinations.

So warns a "risk alert" the Securities and Exchange Commission released Wednesday to provide greater clarity on just what makes certain firms top candidates for close inspection. Every year, the Wall Street watchdog seeks to examine roughly 15% of the more than 15,000 registered investment advisors that fall within its purview, which tend to be firms with $100 million or more in assets under management.

Among the various considerations that could tee an advisor up for examination, according to the alert, are: 

• Repeat findings of the same deficiencies in previous reviews
• A history of misconduct among employees and executives
• Tips or complaints involving the firm
• Business activities that give rise to conflicts of interest, such as the conflicts that sometimes arise at firms that are dually registered as advisors and broker-dealers
• The length of time since the firm's last review
• Recent changes in leadership positions
• Signs that a firm might be vulnerable to market stresses
• Media reports involving the firm

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The SEC's examinations typically review firms' policies, disclosures and conflicts related to the custody and safeguarding of clients' assets, portfolio management and fees and expenses, among other matters. Every year, the SEC publishes its review priorities. The agency warned in February that it would be looking particularly this year for compliance with its new marketing rule, which applies to communications advisors who send to two or more potential clients, and Regulation Best Interest, which calls on brokers to never put their own interests ahead of their clients'.