State Regulatory Actions Increase 33% – NASAA 2020 Enforcement Report

expert witness and enforcement

The NASAA 2020 Enforcement Report, based on 2019 activity, summarizes enforcement activity reported by the 51 U.S. member jurisdictions. Enforcement actions against firms and individuals in 2019 totaled 2,755 actions, up 33% from 2018.

Overall enforcement activities included:

  • 6,698 Complaints Received
  • 6,525 Investigations Initiated
  • 2,755 Enforcement Actions (Including criminal, administrative and civil enforcement actions)
  • 5,898 License Sanctions
  • 957 Years of Criminal Incarceration/Probation
  • $664 Million Funds Ordered Returned to Investors

In an effort to keep “bad actors” from operating in registered capacities, the states imposed  approximately 1,000 registration sanctions and sought registration/license withdrawals from more than 4,800 firms and individuals, a 7% increase from 2018. Registration withdrawals are generally requested when a state may be investigating, or preparing to initiate action to deny, suspend, revoke or restrict a registration.

Regarding registered firms and individuals, the report indicates a total of 1218 actions, a 7% increase over 2018, with the following number of actions:

  • Broker-Dealers (BDs): 200
  • BD Agents (RRs): 391
  • Registered Investment Advisors (RIAs) 193
  • Investment Advisor Representatives (IARs) 434

The numbers are consistent with the trend of actions for RIAs/IARs, which has been increasing since 2014, when RIAs represented only 9% of respondents.

Much of the report was dedicated to the efforts to protect seniors and vulnerable adults. By mid-2020, 28 states had adopted regulations based upon the NASAA Model Act to Protect Vulnerable (Senior) Adults from Financial Exploitation.

Reviewing the Oyster Consulting matrix for reporting requirements for suspected financial exploitation to state securities regulators and adult protective service agencies is a good place to start to understand your requirements.

In 2019 states received 709 reports from BDs and RIAs, opening 233 investigations, 92 delayed disbursements, and bringing 15 enforcement actions.  

The top investment products/sales tactics in senior-related enforcement actions included:

  • Unregistered Securities: 161
  • Traditional Securities: 52
  • Affinity Fraud: 27
  • Variable Annuities: 9
  • Viaticals/Life Settlements: 8
  • Equity-indexed Annuities: 5

The following broader themes were also covered:

  • Promissory notes were the products most often associated with new investigations and enforcement actions.
  • Social media is the new cold call as social media is used often to prospect new investors.
  • Offerings relying on Regulation D, Rule 506 (c), which allows issuers to publicly advertise unregistered securities if sales are made to accredited investors, resulted in 75 investigations and 59 enforcement actions.
  • Stock and equity investments as well as traditional products appealing to investors planning for retirement accounted for 224 investigations and 120 enforcement actions – placing them among the top products used to perpetrate suspect offerings.

The report also noted that a substantial number of COVID-19 related investigations are currently on-going which will be addressed in the 2021 report.

For more information about the NASAA 2020 Enforcement Report, how state regulations may affect your firm or how Oyster can help your firm achieve regulatory compliance, contact us or call (804) 965-5400 and we will be happy to help you.

About the Author: Bill Reilly leverages his examination expertise and relationships with state and federal regulators and self-regulatory organizations to guide broker-dealers and investment advisers through both proactive and reactive regulatory processes and compliance issues. Among others Bill conducts FINRA Rule 3120, Supervisory Control Reviews, Annual Compliance Reviews for federally and state-covered investment advisers, creates and/or updates policies and procedures for opening and monitoring senior and vulnerable adult client accounts, has been retained as an expert witness by law firms representing industry participants in arbitrations and regulatory matters, updates policies and procedures for both broker dealer and investment advisers, and acts as an independent third party in reviewing firm activity prior to and as a result of regulatory actions and settlements.