A risk alert from the Securities and Exchange Commission (SEC) listed top reasons why a registered broker-dealer might be the subject of an examination, with factors including length of time since the last exam, prior violations, a whistleblower tip, supervisory concerns, and/or signs of financial stress.

The risk alert, published Wednesday by the SEC’s Division of Examinations, attempted to answer the question, “Why us?” as it relates to registered broker-dealers being chosen to be the subject of a supervisory examination by the agency.

The alert also attempted to answer a second question: “Why now?”

“Given the variety in the broker-dealer population, the division utilizes a risk-based approach for both selecting firms to examine and in determining the scope of risk areas to review in each examination,” the alert said.

The alert said reasons for choosing a broker-dealer to be the subject of an examination include:

  • Prior examination history;
  • Supervisory concerns, such as disciplinary history of associated individuals or affiliates;
  • Tips, complaints, or referrals involving the firm;
  • The length of time since the firm’s last examination;
  • The firm’s customer base;
  • Products and services the firm offers;
  • Financial notifications or alerts that indicate the broker-dealer is experiencing financial stress;
  • Reporting by news and media that might involve or impact the firm;
  • Information filed by the firm with the SEC or with a self-regulatory organization; and/or
  • Whether the firm holds customer cash and securities.

The alert also detailed expectations SEC examiners will include in the letter notifying the broker-dealer it will be subject to an examination.

Broker-dealers will be asked to provide general information about the firm, particularly its business and securities activities; written policies and procedures established, maintained, and enforced to address its securities activities; and information for the staff to perform its own testing for compliance in various areas.

The alert also included a sample initial information request list, which detailed the types of documents examiners will require.