NASAA 2021 Enforcement Report Highlights Investor Threats Impacting Seniors
On September 29, 2021, the North American Securities Administrators Association (NASAA) released its 2021 Enforcement Report, based on 2020 data (the Report), noting continued investigation and enforcement efforts by state securities regulators to combat fraudulent investment schemes. NASAA is an international association of state, provincial, and territorial securities regulators in the United States, Canada, and Mexico, and conducts an enforcement survey of its U.S. members annually. The Report highlights several enforcement focus areas during 2020, primarily related to the protection of seniors.
While not rising to levels seen in 2019, state securities regulators achieved considerable results in 2020 notwithstanding the Covid-19 pandemic. State regulators conducted 5,501 new investigations (a 16% decrease from 2019) and reported 2,202 enforcement actions (a 20% decrease from 2019). As a result of these efforts, $306 million in restitution was ordered to be returned to investors, in addition to the imposition of $42 million in fines and 919 years of incarceration and probation. Within the licensed securities industry, state regulators reported actions against 497 registered parties, including 153 Registered Investment Advisers (RIAs), 115 Investment Adviser Representatives (IARs), 110 broker-dealers, and 119 broker-dealer affiliated agents. There were also 619 enforcement actions against unregistered parties.
The Report highlights several areas of enforcement activity during 2020. First, protecting seniors remains a priority, especially given the growing aging population. Currently, 32 jurisdictions have enacted rules or legislation based on NASAA’s Model Legislation or Regulation to Protect Vulnerable Adults from Financial Exploitation (Model Act). The Model Act requires financial services professionals to report to a state securities regulator and adult protection services agency when a reasonable belief exists that financial exploitation of an eligible adult has been attempted or has occurred. The Model Act also provides that a broker-dealer or RIA may delay a disbursement from an account if it is reasonably believed that the disbursement will result in financial exploitation. In 2020, 24 of the 32 states implementing the Model Act received a total of 1,102 reports from broker-dealers and RIAs – a 55 percent increase from 2019. These reports resulted in 245 investigations, 139 delayed disbursements, and 65 enforcement actions.
During the 2020 Covid-19 pandemic, state regulators saw a rise in commodities fraud including gold and silver investment schemes targeting seniors. These schemes often involve online marketing campaigns and high-pressure telemarketing efforts designed to instill fear about the economy or securities markets. Victims who fall prey to these schemes may liquidate their traditional securities holdings and use the proceeds to purchase overpriced gold or silver coins, often also paying significant fees as high as 25 or 35 percent. The number of commodities schemes investigations more than doubled in 2020, increasing from 69 in 2019 to 147. There were also 42 enforcement actions against promoters in 2020, compared to 23 in 2019.
The Report also addresses a common opportunity for fraud: unregistered securities. As a general rule, every offer of securities to the public in the United States must be registered with the Securities and Exchange Commission (SEC) pursuant to the Securities Act of 1933 (the ’33 Act). Private placement offerings, however, which are intended to enable smaller businesses to raise capital, are exempted from registration under the ’33 Act pursuant to SEC Regulation D, Rules 506(b) and 506(c). Private placement investments are not for all investors, but are largely reserved for “accredited investors” who meet certain net worth or income requirements. Private placements often come in the form of restricted securities that are illiquid and difficult to resell, and their disclosures may not be as detailed as those of registered securities. Nevertheless, some broker-dealers market and sell private placements to average retail investors, including those who are nearing or are in retirement. In 2020, state regulators opened 196 investigations and reported 67 enforcement actions related to private placement offerings.
The attorneys at Giarrusso Law Group LLC have considerable experience with issues unique to the financial services industry, including federal and state legislative and regulatory developments affecting both investors and financial advisors. If you have a question regarding this recent announcement or any other industry matter, you can contact us at (201) 771-1115 or info@gialawgroup.com for a free and confidential consultation.