Whether it comes from a doctor, a teacher, or a financial regulator, the word “exam” is rarely something to look forward to. Whatever the topic, it means some part of you, your work, or your business is about to face strict scrutiny.
Exams are a sometimes-painful fact of life in financial services, but preparation can reduce the sting. When regulators come calling, have a good sense of what they’ll want to see, and how you plan to show it to them.
Exams Are All About Risk
Financial regulations exist mainly to limit risk as it relates to investors, issuers, market stability/fairness, and other stakeholders and issues.
Broadly speaking, regulators usually want to know how your firm takes risks, where your firm allocates risks, and whether your firm creates risks. They want to know if you act as an honest broker, a careful fiduciary, and a responsible market participant. Your probable responses to those questions are “yes, yes, and yes,” so how can you anticipate the areas on which regulators will focus?
Here are some reliable indicators:
Consider how you make most of your money
An examiner is likely to explore the most lucrative practice or product line in your business. This is standard practice. Outsized revenue (or losses) can signal outsized risk-taking with client money. They will also want to look at high-volume lines of business that generate a disproportionate share of revenue, regardless of the risk—or lack thereof—to which they expose individual clients. Lax record-keeping and other risky, corner-cutting practices often plague high-volume lines of business.
Trending Topics
Hot topics in financial regulation roughly correlate to social and political trends. Regulatory priorities evolve with political administrations, as well as market developments and crises. However, there’s no reason for your firm to get blindsided by changing priorities.
Most regulators give clear signals of where they expect to focus their attention in exams, both through messaging from regulatory leaders in speeches and op-eds, and directly through advisories posted to their websites.
For example, here are the 2025 exam priorities published by FINRA and the SEC. Read them and develop a proactive game plan for how your firm will address each topic area.
Consider prior audit challenges
If your firm faced regulatory discipline in prior periods, then you can be confident a regulatory exam will revisit the same areas to see if the previous deficiencies have been addressed. You’d be surprised how many firms overlook this. To rule out the possibility that past violations reflect an endemic flaw in your business practices, regulators look for evidence that you’ve taken appropriate steps to avoid similar violations.
Make a regular, periodic practice of reviewing old violations, remedial measures you took at the time, and where those efforts stand today. You can gain significant credibility with examiners by speaking fluently and confidently about past violations, lessons learned, and firm-wide improvements.
In many cases, it may build rapport and ethical credibility to thank examiners for identifying previous violations and thus helping to strengthen your compliance program. Conversely, you may lose credibility if you signal, even inadvertently, that you consider past discipline to have been unwarranted or consider it “no big deal.”
Consider anything that escaped prior scrutiny or has changed
Reflect on your last regulatory exam and identify the practices or business lines that did not get attention or did not exist at the time. As a rule of thumb, if any of those practices or lines have changed significantly in terms of revenue generation or risk profile, then examiners will probably want to look at them.
This applies to business shifts in either direction. Take an objective look at facets of your business that both materially succeeded and woefully failed since your last exam. Be prepared to explain those shifts, including significant costs that drove you away from a practice or line, efficiencies or opportunities that attracted you to another, and (most importantly) regulatory issues you recognized and addressed involving them.
Explore Enforcement and Rulemaking Efforts
Sometimes an individual regulator’s enforcement actions speak as loudly as annual regulatory guidance on exam priorities. Stay current on disciplinary actions by your examining regulator. Read the documentation carefully to determine if you have a similarly deficient process. It may be your last chance to fix the problem before the regulator finds it.
You can stay up to date by reading press releases and enforcement filings on regulators’ websites (AscentAI automatically curates a proprietary library of these documents for you, across all regulators, which saves you the time of scouring regulatory websites).
Treat anticipated rulemaking as a leading indicator of what regulators will care about next. Projected future rules may influence examiners in deciding what to dig into currently, so be sure to stay on top of these.
The prospect of a regulatory exam does not need to be filled with mystery as well as dread. The steps above can help you answer regulator concerns in ways that lend credibility to your compliance regimen. In addition, utilizing regulatory compliance automation from AscentAI, like AscentHorizon and AscentFocus, you’ll be able to automatically log your decisions and actions and access reports to provide you with defensible proof of compliance during exams.
Have a question about horizon scanning and/or regulatory change management automation? Send us a message and we’d be happy to answer you.
