The North American Securities Administrators Association (NASAA) recently released its annual enforcement report, which shows increasing numbers of investigations and enforcement actions taken by state securities regulators to protect investors and maintain the integrity of the nation’s financial markets.
In its 2020 Enforcement Report on 2019 Data, which includes responses from 51 jurisdictions throughout the United States, NASAA reported that state securities regulators conducted 6,525 investigations in 2019, up 23 percent from the year before, and took 2,755 enforcement actions, up 33 percent from 2018. These actions led to $634 million in restitution ordered returned to investors, fines of $80 million and criminal relief of 956 years, including incarceration and probation.
Within the licensed securities industry, state securities regulators reported actions against 1,218 registered parties, including 200 broker-dealer firms, 391 broker-dealer agents, 193 investment advisers and 434 investment adviser representatives. State securities regulators also take actions to protect the public from unlicensed actors and unregistered schemes.
The top five enforcement trends identified in the report, include:
In 2019, more than 4,800 license/registration applications were withdrawn as a result of state action or attention, a slight increase from around 4,500 withdrawals reported during 2018. This information is indicative of the steps regulators take to prevent bad actors from entering the market – in many cases, applicants withdraw their candidacy for licenses or registrations due to state investigations or forthcoming actions to deny, suspend or revoke their applications.
State securities regulators continue to work to ensure compliance within the licensed industry. In 2019, state securities regulators imposed approximately 1,000 licensing sanctions. They also denied or barred 382 parties and revoked the licenses/registrations of 84 parties. In other cases, state regulators conditioned or suspended 491 individuals and firms. Within the licensed securities industry, state securities regulators reported actions against 1,218 registered parties, including 193 investment advisers and 434 investment adviser representatives.
For the 2019 reporting year, state securities regulators also reported an increase in the number of cases brought against unregistered parties. Actions against unregistered actors totaled 738 in 2019, an increase of 15% from reporting year 2018. These recent actions included cases against 57 finders or solicitors, 51 financial planners, 66 insurance firms and agents and 18 foreign actors. This data does not account for recent unregistered financial schemes – including unregistered financial schemes exploiting COVID-19.
States fielded 709 reports, opened 233 investigations and brought 15 enforcement actions relating to the NASAA model act. Firms also notified state securities regulators that they had delayed disbursements of funds 92 times. Given the time typically necessary to complete an investigation and initiate an enforcement action, it is likely that some of the data is not yet shown and will be reported next year.
Timely reporting of suspected exploitation to authorities is an important part of ensuring that appropriate steps can be taken to help stop misconduct. FINRA’s “Trusted Contact” Rule has also helped in this effort, and NASAA will continue to work closely with FINRA to prevent, detect, and stop fraud involving seniors and vulnerable adults.
According to NASAA, they received 607 complaints, initiated 486 investigations and implemented 208 enforcement actions involving seniors. The top five enforcement actions related to investment products/tactics included: Unregistered securities, traditional securities, affinity fraud, variable annuities and viaticals/life settlements.
Promissory notes have been frequently listed on the annually released NASAA “Top Ten Traps” list. In 2019, state securities regulators overwhelmingly reported that promissory notes were the products most often associated with new investigations as well as enforcement actions. State securities regulators reported initiating 321 investigations in which promissory notes were used to facilitate an alleged fraud. As a result, state securities regulators initiated 202 enforcement actions, which includes administrative, criminal, and civil actions.
Pop-up advertisements and other ads on social media feeds are geared toward a user’s personal interests and prior search history, helping to make social media the new cold call. Just as unsolicited telephone calls seek personal information or trying to make a sale, social media is now used frequently to approach new prospects. For example, it is not uncommon to see pop up advertisement for a recently searched item when scrolling through social media posts. NASAA warns that investors need to be careful about what they click or be prepared to receive unwanted solicitations.
For example, a company going by the name Forex & Bitcoin Trader advertised that a $1,000 investment could earn $10,000 in two weeks “guaranteed or your money back.” Forex & Bitcoin Trader did not provide any risk disclosures for investing in bitcoin, cryptocurrencies or foreign currencies. The Texas State Securities Board issued an emergency cease and desist order on August 6, 2019. On November 1, 2019, the Arizona Corporation Commission issued a temporary order to cease and desist. On March 31, 2020, the Arizona Corporation Commission issued its final decision finding violations of the registration and antifraud provisions of the Arizona Securities Act.
Issuers must generally register securities with federal and state regulators before selling the securities to the public. However, Regulation D, Rules 506(b) and 506(c) – often referred to as private offering exemptions – permit issuers to sell securities without first complying with state and federal registration requirements. Although legitimate businesses may rely on private offering exemptions to lawfully raise capital, illegitimate issuers continue to exploit the exemptions to defraud the general public.
State securities regulators opened 275 investigations and 144 enforcement actions involving offerings reliant upon the law. This includes 75 investigations and 59 enforcement actions relating to Rule 506(c), which generally permits issuers to publicly advertise unregistered securities so long as they limit sales to accredited investors.