SEC tells preview what your next exam will test

In poker, a tell is an involuntary leak. RIABiz argues that securities regulators have tells of their own, and they leak in public documents: risk alerts, sweep-exam announcements, and regulator speeches.

The first two tells came early in the year. On Jan. 4, the SEC published a Risk Alert on registered investment advisers' use of social media. On Feb. 27, a National Examination Risk Alert followed on unauthorized trading in client accounts. RIABiz's reading: when the agency issues guidance like this, it has identified a risk it believes can hurt investors, and that risk is likely to become a focus of upcoming exams.

Sweep exams are a second channel. The SEC uses sweeps to learn whether a widespread practice is harming investors, and when a sweep targets a practice, the outlet's advice is blunt: be fully compliant before examiners walk in. If a sweep turns up widespread problems, RIABiz says the agency's priorities shift. The SEC's unannounced exams, the article notes, are growing more common, which makes a 'I'll-get-to-it' compliance strategy an even worse idea than before.

State-registered firms have their own early-warning system. Late last year, the North American Securities Administrators Association identified the top deficiencies found during coordinated exams of state-registered advisory firms. RIABiz calls it a safe bet that most states will check for the same deficiencies in the coming year. For a firm that has not fixed them, that list is a draft of the next exam's findings.

Speeches are a third tell. The SEC posts transcripts of remarks by commissioners and directors; NASAA posts its own. RIABiz points to Commissioner Daniel M. Gallagher's Feb. 24 remarks at 'The SEC Speaks in 2012,' where he discussed failure to supervise. One speech is a data point; a series shows which themes keep returning — and which are likely to become exam questions.

None of this replaces a compliance program. A risk alert tells you where the SEC is looking, not everything it will look at. The argument for tracking these documents is lead time: a social media policy written before the exam, a discretionary trade documented before the letter arrives, a supervision file already complete. The firm that fixes a known issue before the examiner asks about it has done the cheapest compliance work available.

Make it a habit. Put a quarterly check on the calendar: download new risk alerts, skim recent speeches, compare the firm's policies against the list, and write down what you reviewed. That record is itself exam evidence.

That's the real lesson of the tells. Regulators often announce what they care about before they go looking for it. An adviser who reads about a problem first in a risk alert has a choice; one who reads about it in a findings letter does not.