Last year, 70% of all SEC examinations resulted in a deficiency letter. Even more startling was the high number of examinations—6% of advisors and 14% of broker-dealers—that resulted in a referral to the SEC's enforcement staff. Many of these referrals involved suspected fraud.

Firms can take effective steps to lessen this risk. Begin with thorough background checks before hiring. Also, demand the highest level of integrity, supported by a strong code of ethics. A recent report by the Association of Certified Fraud Examiners (ACFE) found that measures as simple as surprise audits, job rotations and mandatory vacations for employees were effective in preventing and/or detecting fraud; sometimes evidence of fraud comes to light if the perpetrator is not in the office to conceal it. To deter fraud, the SEC advises firms to:

• Ensure that the person responsible for trading doesn't report the results of those trades.
• Have a third party prepare and send account statements to clients.
• Use independent confirmations to ensure clients receive actual statements—instead of ones that may be falsified.

Jane Worthington is manager of information products and publisher of RegulatoryRegister.com at NRS, a division of SourceMedia.