New Jersey Bureau of Securities Chief Christopher Gerold, who helped craft the state’s fiduciary rule, became president in mid-September of the North American Securities Administrators Association.
Gerold, who will serve a one-year term as NASAA’s president, assumes his new role as the Securities and Exchange Commission’s Regulation Best Interest comes under legal attack. Two separate lawsuits were filed in the Southern District of New York in mid-September by seven states and the District of Columbia as well as XY Planning Network.
NASAA stated that it plans to follow the states’ attorneys general challenge to Reg BI “closely.” While it is not a party to the litigation it “supports members’ rights to protect their investors,” the association of state securities administrators said.
New Jersey’s fiduciary plan has been characterized as far exceeding Reg BI as well as the Labor Department’s now defunct fiduciary rule. The state’s rule seeks to “establish a uniform standard for financial professionals” and “rectify investor confusion that results from the lack of uniformity.”
Despite pushback from the brokerage industry, the New Jersey Securities Bureau forged ahead and proposed its fiduciary rule in mid-April before the final Reg BI was approved on June 5. The bureau said Reg BI lacked “sufficient protections for New Jersey investors.”
Gerold said in proposing the rule that it “codifies a standard that most investors believe they are already receiving from their financial professionals.”
New Jersey, Nevada and Massachusetts have proposed fiduciary rules but none have been finalized.
In his inaugural speech as president at the group’s annual conference in Austin in mid-September, Gerold said he’d continue NASAA’s collaboration with the SEC and the Financial Industry Regulatory Authority on investor protection initiatives.
“Protecting investors requires all hands-on deck,” he said. “We may not always agree, but that does not mean we cannot put differences aside to work toward our common mission of investor protection.”
Fraud Gets Personal
As regulators, Gerold continued in his speech, “the things we do matter. Chances are we may never meet many of the people we are helping — those who we have prevented from being victims. Enforcement of state and provincial securities laws is at the heart of what we do every day.”
Born in New Jersey, Gerold started his legal career as a Deputy Attorney General in the Securities Fraud Prosecution Section of the New Jersey Division of Law, where from 2005 to 2010 he represented the Bureau during investigations and as a lead trial attorney in litigated matters.
He relayed to attendees at the event in Austin the tale of a New Jersey couple who were “unsophisticated investors being ripped off.”
The story was about a traveling textile salesman and school nurse in the early 1990s who “had worked hard, saved money where they could, and were managing to successfully raise” three children.
“Through the years this couple had managed to set aside a moderate nest egg that they would use to pay for their children’s college when the time came,” Gerold said.
Then one day, they got a call from a broker who promised he could provide a greater return than the couple was receiving from their bank.
The couple met the broker and decided to invest the majority of their life savings with him. The broker met their children and “promised the investments he was selling were safe” and approved by the broker-dealer and that it would pay a high interest rate.
“Unfortunately, the product was a fraud,” Gerold said. The couple “lost their investment. It was gone. They lost their financial security. They lost their ability to pay for their children’s college,” he said.
“Why I am telling you this story?” Gerold asked attendees. “Because that couple are my parents.”
He said he saw “firsthand the impact of securities fraud. I reflect upon this experience in my daily responsibilities as a securities regulator and challenge you to do the same. Because what we do matters.”
Enforcement in Action
In releasing NASAA’s 2019 enforcement report at the event, Gerold said state and provincial securities regulators stand ready “to aggressively protect investors from fraud and police the integrity of our capital markets well into the 21st century.”
NASAA reported that state securities regulators conducted 5,320 investigations in 2018 and took 2,067 enforcement actions overall. Also, for the third year in a row, the group is seeing an increase in investigations of unregistered individuals.
The actions led to more than $558 million in restitution ordered returned to investors, fines of $490 million and criminal relief of 1,753 years, including incarceration and probation. Enforcement actions involving registered and unregistered actors ranked equal in numbers, the report states.
States reported taking actions against 639 registered individuals from broker-dealers and investment advisors, and 639 unregistered individuals and firms.
To date, 23 jurisdictions have enacted rules or legislation based on the NASAA Model Act to Protect Vulnerable Adults From Financial Exploitation, including four in 2019.
In late August, New Hampshire became the latest state to enact legislation to combat senior exploitation based on NASAA’s model rule.
NH S 252, which passed with bipartisan support in the New Hampshire House and Senate in July, permits broker-dealers and investment advisors to delay disbursements from accounts of eligible individuals when the BD or advisors, or other qualified individuals, reasonably believe that the requested disbursement may result in financial exploitation.
So far this year, Virginia, Arizona and Maine have also enacted similar bills, bringing to 23 the number of states with laws based on the NASAA Act. The association expects “more legislative activity” around senior exploitation issues when state sessions resume in 2020, according to a NASAA spokesman.
The model act mandates reporting to a state securities regulator and state adult protective services agency when an agent or representative has a reasonable belief that financial exploitation of an eligible adult has been attempted or has occurred.
According to NASAA’s 2019 enforcement report, of the 23 states with laws based on its model act, 14 reported receiving 426 reports from broker-dealers and investment advisors, resulting in 81 investigations, 57 delayed disbursements of funds, and 32 enforcement actions in 2018.
Cyber Infractions on the Rise
NASAA also found an increase in cybersecurity-related infractions among state-registered advisors.
Exams in 41 U.S. jurisdictions during the first six months of 2019 found cybersecurity deficiencies in 26% of advisory firms, up from 23% during the last series of coordinated exams in 2017, according to NASAA’s 2019 Investment Adviser Coordinated Exams Report.
The top five cybersecurity-related deficiencies included: no testing of cybersecurity vulnerability, lack of procedures regarding securing or limiting access to devices, lack of procedures related to internet connectivity, weak or infrequently changed passwords, and no or inadequate cybersecurity insurance, the NASAA report found.
Washington Bureau Chief Melanie Waddell can be reached at firstname.lastname@example.org.