Enforcement Report Issued by State Securities Regulators Emphasize RIAs

November 6, 2012

The North American Securities Administrators Association (NASAA) recently released its Enforcement Report for 2012. A copy can be found here.

Thumbnail image for Thumbnail image for Robert L. Herskovits, Esq.NASAA is an association primarily comprised of state securities regulators. Through the association, its members engage in multi-state enforcement actions and other collaborative activities. NASAA's Enforcement Section tracks trends in securities fraud and oversees the activities of various Project Groups, including: Internet fraud investigations, oil/gas ventures, Reg D investigations, securities investigation database and enforcement zones.

The Enforcement Report contains a multitude of interesting statistics. According to NASAA:

  • The majority of fraud cases involved unregistered persons and/or selling unregistered securities.
  • The most reported securities fraud violations (in order of frequency reported by states) concerned Rule 506 or Reg D offerings, real estate investment schemes, Ponzi schemes, oil & gas investments, and structured products.
  • Interestingly, the NASAA noticed a spike in actions against investment advisor firms, with a total of 399 actions reported, almost twice that reported one year earlier. The number of actions filed investment advisor exceeded the number of actions filed against broker-dealers (359 actions).
  • State securities regulators opened 6,121 investigations, filed 2,602 enforcement actions, and ordered investor restitution of $2.2 billion.
  • Enforcement "trends and developments" reported by the states included the securities fraud violations noted above, as well as bogus promissory notes and affinity fraud.
  • "New threats" include crowdfunding and internet offers, "inappropriate advice" from RIAs, "scam artists" using self-directed IRAs, and EB-5 investment-for-visa schemes.

Regulatory Headaches Coming for Mid-Sized RIAs

The Enforcement Report is interesting because it suggests that mid-sized RIAs will be subject to heightened scrutiny by the states. According to the Report: "The 2010 Dodd-Frank Act laid the groundwork for a major regulatory shift, transferring thousands of mid-sized investment advisors to primary supervision by state regulators, rather than the SEC." It went on to conclude: "As the states implement regular examination schedules and analyze investment advisors that have not been audited in many years, more problems are likely to be discovered."