NASAA Says Reported Complaints Are Just the Tip of the Iceberg

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Every year, the North American Securities Administrators Association (NASAA) conducts an annual survey of U.S. members to clarify trends in securities fraud, investor protection, and other regulatory issues. For the 2015 Report, 49 jurisdictions shared data, providing a general overview of state enforcement efforts for the 2014 fiscal or calendar year.

While the NASAA says the survey reveals a number of important trends in investor protection and securities regulation, it also notes that the “report undoubtedly undercounts many statistics since it does not include enforcement statistics from every jurisdiction on each survey question posed.”

The tip of the iceberg?

According to the NASAA’s Enforcement Section, state securities regulators received 11,340 complaints from aggrieved investors and conducted 4,853 investigations in the 2014 reporting period. More than 2,000 administrative, civil and criminal enforcement actions resulted, involving more than 3,000 respondents and defendants.

While a number of prosecutions are ongoing, state securities regulators’ activities and assistance in criminal prosecutions resulted in 1,629 years in prison sentences and 503 years ofprobation. Moreover, the Association says, U.S. jurisdictions imposed more than $400 million in investor restitution orders and levied fines or penalties of almost $174 million.

That’s a lot of prison time and a lot of money.

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Are you in trouble?

In the 2014 reporting period, state securities regulators conducted 4,853 investigations. These formal investigations were and are supplemented by extensive efforts to informally resolve complaints. Partnering with other law enforcement agencies, state securities regulators referred 584 leads to sister agencies and referred 624 incoming referrals from those agencies.

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State securities regulator investigations led to more than 2,000 enforcement actions, including administrative, civil, and criminal actions against more than 3,000 respondents or defendants.

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Big bucks

The NASAA ordered wrongdoers to return more than $400 million to aggrieved investors and its U.S. jurisdictions levied fines or penalties of nearly $174 million, while the states also demanded respondents pay almost $42 million in costs or expenses.

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Criminal sanctions imposed on the worst offenders collectively totaled nearly 1,629 years of jail time. And state regulators barred other bad actor from the licensed community and limited the activity of licensees.

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Who got punished for what

The survey reports that 746 state enforcement actions involved fraud, traditionally marked by material misrepresentations, false statements or a scheme designed to defraud or deceive an investor. The NASAA also noted that while these fraud cases could, and in many instances did, involve registered brokers or investment advisers (or their agents or representatives), a majority involved unregistered individuals selling unregistered securities. Of the 746 reported cases of fraud, 484 involved unregistered securities, and 675 actions involved unregistered firms or individuals.

However, licensed investment advisors did not escape unscathed, as the NASAA reported 781 enforcement actions against licensed individuals and firms.

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In addition to the NASSA U.S. member enforcement actions, the 2015 survey reports that the states also launched hundreds of investigations against registered securities industry members. These reported 442 investigations into dishonest or unethical practices by securities licensees, 334 investigations involving books and records violations, 157 investigations involving suitability, and 99 investigations involving failure to supervise. Dozens of other investigations looked at cases of unauthorized trading, churning, and selling away.

Fix it. Fix it NOW!

The NASAA recommendations to Investment Advisors are simple: Pay attention and do the right thing. It’s list of “best practices” recommends Investment advisors and their compliance teams:

  • Prepare and maintain all required records, including financial records. Back-up electronic data and protect records.
  • Prepare and maintain client profiles or other client suitability info.
  • Review and update all contracts. Make sure all fees are clearly noted and adequately explained in the contract.
  • Review and revise Form ADV and disclosure brochure annually to reflect current and accurate information. File amendments in a timely manner.
  • Prepare and distribute a privacy policy initially and annually.
  • Calculate and document fees correctly in accordance with contracts and ADV.
  • Keep accurate financials. File timely with the jurisdiction. Maintain surety bond if required.
  • Implement appropriate custody safeguards, paying attention to direct fee deduction if applicable.
  • Review all advertisements, including website and performance advertising, for accuracy.
  • Provide disclosure brochure to clients initially, and then provide updates and offers to deliver afterwards as required.
  • Prepare a written compliance and supervisory procedures manual relevant to the type of business to include a business continuity plan.
  • Review solicitor agreements, disclosures, and delivery procedures.

Ready. Set. Compliance!

Although investigations and enforcement actions decreased slightly from the year prior, if you’re a state-registered investment advisor, you know it’s only a matter of time before the regulators show up at your door. So what are you waiting for? Get your compliance processes and procedures, and your documentation in order. Regulatory oversight is not going to go away. While you already may feel compliance is job with no end, there’s no question that going forward you will be doing more of it. Want more time to do your real work? Let’s talk. Ask about Patrina’s comprehensive compliance solutions specifically designed for Broker/Dealers, RIAs, and FCMs.

Let’s talk (212- 233-1155).

 

 

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