A tip, a complaint, a news article, high fees or firm leadership changes. These are among the things that can to a registered investment advisor firm being targeted for one of the 2,250 exams the SEC conducts annually, the regulator said in a new risk alert today.

"When selecting advisers to examine, the [Enforcement] Division considers factors such as which advisers provide services, recommend products, or otherwise meet criteria relevant to the focus areas described in the Division’s priorities," the agency said in the alert. Exam priorities, the agency noted, are detailed in the SEC's annual exam priorities report.

Problems found in past reviews can also lead to increased scrutiny, the agency said in the regulatory alert.

“Prior examination observations and conduct, such as when the staff has observed what it believes to be repetitive deficient practices during more than one review of a firm, significant fee- and expense-related issues, and significant compliance program concerns, can also trigger an exam,” said the SEC, which oversees 15,000 advisors managing $115 trillion in assets.

Although the number of RIA firms has increased by 13% over the past three years, “the staff has continued to examine approximately 15% of all (domestic and international) advisers each of these years,” the SEC said.

The industry experienced a 6.5% increase in enforcement actions last year as a result of exams, with 760 enforcement actions ordered and $6.439 billion in penalties, disgorgement and pre-judgement interest issued—the most on record in SEC history and up from $3.852 billion in fiscal year 2021. 

The SEC said that other issues that can result in an exam include the following:

• Disclosure histories and supervisory concerns at a firm, such as questionable disciplinary histories of reps or affiliates.

• Business activities of the firm or personnel that may create conflicts of interest.

• Length of time since the firm’s last exam and registration, with an emphasis on newly registered RIAs.

• SEC staff interest in a particularly compliance risk area.

• Indications that an RIA might be vulnerable to financial or market stresses.

• Reporting by news and media that may involve or impact the firm.

• The firm having access to client and investor assets.

Once an RIA is selected, the regulator does an additional risk assessment to determine the scope of the examination and the particular areas of the business that examiners will review, including targeted markets, products, services, operations and practices, the SEC said.