SEC Risk Alert – Key Takeaways for Broker-Dealers Subject to Examination

By Anna de Venoge, Supervisor; Rachel DiDio, Partner; and Victor Peña, Partner 

With the Securities and Exchange Commission’s (SEC) mission to protect investors, ensure market integrity and support responsible capital formation, its Division of Examinations assesses a selection of registered broker-dealers annually. The results are then used to identify and monitor risks, improve industry standards and lay the groundwork for future rule-making initiatives. On June 5, 2024, the Division published a Risk Alert aimed at broker-dealers subject to examinations, providing guidance on the overall process. The Alert details the examination selection process and provides insight into the types of documents and evidence that may be requested during an examination.

Below are some key takeaways.

Firm Selection Process

The Division considers several factors when selecting examination candidates, including, but not limited to, examination history, past disciplinary actions, complaints (if any), the date of the previous examination, customer base and services provided, financial alerts, news or media reporting, firm filings and whether or not the firm has custody of customer assets. Additionally, the Division may also elect to examine an individual branch or office of a firm based on identified risk factors with a specific location.

Focus Area Selection

The scope of any examination will vary depending on the firm’s business, services and risks; however, there is often an annual focus area. Firms are encouraged to review the Division’s annual publication of its Examination Priorities, which highlights risk factors, trends and the areas that will be the focus in the upcoming year. Firms should also consider that the scope of an examination is subject to adjustment based on staff observations and facts and circumstances present at the time of the examination.

Documentation Requests

In anticipation of an upcoming examination, the Division will send a notification letter to the broker-dealer, including an initial request list of files that the staff will review during the examination process. Firms should be prepared to provide:

  • General Information: This may include organizational documents, clearing agreements, expense sharing agreements, compensation arrangements and financial information such as annual audited reports and general ledgers. The objective is for the staff to better understand the firm’s business and day-to-day operations.

  • Support for Supervisory Compliance and Structure: Staff will look to understand how firms address compliance responsibilities through review of written supervisory policies and procedures. Firms may also be asked to provide employee manuals, customer complaint logs, support for branch office oversight, business continuity plans, access controls and reports of any cybersecurity incidents.

  • Support for Regulatory Requirements: Focus is often placed on testing for compliance with regulatory requirements. Accordingly, the Division’s request list will likely include Anti-Money Laundering written supervisory policies and procedures; Form CRS; customer list and fee schedule; purchase and sales blotter; and support for net capital and customer protection (i.e., Financial and Operational Combined Uniform Single [FOCUS] reports, net capital computations, reserve computations, concentration reports, bank letters and allocations for customer and proprietary accounts of broker-dealers [PAB] reserve computation). Often, these requests align with the supporting documentation reviewed by auditors during the annual audit.

Refer to the Risk Alert for a Sample Initial Information Request List.

Be Prepared

The SEC’s mission to protect investors is also the responsibility of broker-dealers, and the most recent Risk Alert serves as a reminder for firms to prioritize regulatory compliance by maintaining thorough documentation in anticipation of an examination. By placing emphasis on proactive compliance, firms will be well prepared for an examination by the Division.

Contact Us

If selected for an examination, your PKF O’Connor Davies client service team can help. For assistance, or to further discuss any potential examination concerns with our specialists, contact the partner in charge of your account or:

Anna de Venoge
Broker-Dealer Specialist
646.699.2916 I

Rachel DiDio
Broker-Dealer Specialist
646.965.7780 I

Vic Peña
Broker-Dealer Practice Leader
646.449.6380 I