More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
Enforcement actions taken against investment advisory firms by state securities regulators nearly doubled to 399 in 2011—accounting for 15% of all enforcement actions handled by state securities regulators, according to the North American Securities Administrators Association’s (NASAA) annual enforcement report.
Prison time resulting from state-initiated actions totaled 1,662 years, up 47% from the year before, and the number of advisors and broker-dealers removed or barred from the industry spiked as well, according to NASAA’s report, released this week.
Of the 6,121 investigations state securities regulators conducted last year, 2,602 of them led to criminal, administrative and civil enforcement actions, NASAA said, with the report also noting that financial abuse of seniors was identified in nearly 600 reported enforcement actions.
State securities regulators also removed or barred unscrupulous brokers and advisors from the licensed community. In 2011, nearly 2,800 licenses were withdrawn due to state action, up 7.7% from the year before; and 774 licenses were denied, revoked, suspended or conditioned, up 20% from 2010.
Matt Kitzi, Missouri securities commissioner and chair of NASAA’s Enforcement Section, said in late August when announcing NASAA’s annual list of top investor threats that he expects to see more advisor violations as state regulators start examining midsize advisors—those with $25 million to $100 million in assets under management—that transferred from federal to state registration under the Dodd-Frank “switch” in July.
Many midsize advisors “have not been examined in many years or ever,” Kitzi said. “We think we’ll continue to find more enforcement issues with these advisors.”
State-initiated enforcement actions resulted in more than $2.2 billion in investor restitution orders in 2011. Heath Abshure, NASAA president and Arkansas securities commissioner, said in a statement announcing the report findings that much of this restitution is attributable to repurchases of auction rate securities (ARS) stemming from state-led actions.
State securities regulators also levied fines or penalties of $126 million.
The majority of the investment fraud cases reported by state securities regulators featured unregistered individuals selling unregistered securities, with more than 800 reported actions involving unregistered securities, and more than 800 actions involving unregistered firms or individuals.
The survey found 240 suitability investigations were reported, the most common of the reported industry investigations, followed closely by the 237 reported investigations into dishonest or unethical practices. In addition, nearly 150 failure‐to‐supervise investigations were reported.
The states also reported dozens of investigations triggered by suspected violations in each of the following categories: books and records, unauthorized trading, selling away and churning.
For the second consecutive year, NASAA says that Regulation D Rule 506 private offerings and real estate investment schemes were the most reported products “at the heart” of state securities enforcement actions.
Violations involving structured products were reported the most widely, the report found, with dozens of cases reported involving variable or equity indexed annuities, and 16 states reported a total of 47 actions involving hedge funds or private equity funds.
The report states that “inclusion of these products in this summary is no surprise, as the items referenced above have led the list of most common products at the center of enforcement actions for years.”