NASAA 2020 Enforcement Report Highlights Increased Actions by State Securities Regulators
On September 23, 2020, the North American Securities Administrators Association (NASAA) released its 2020 Enforcement Report (based on 2019 data), detailing a considerable increase in the number of investigation and enforcement actions taken by state securities regulators. Specifically, the data show that state securities regulators conducted 6,525 investigations in 2019, an increase of 23% from 2018. In addition, state securities regulators initiated 2,755 enforcement actions, an increase of 33% from 2018. As a result of these efforts, $634 million in restitution was ordered to be returned to investors, in addition to the imposition of $80 million in fines and 956 years of incarceration and/or probation.
In accordance with their efforts to regulate the licensed securities industry, NASAA’s report using 2019 data shows that state securities regulators reported actions against 1,218 registered parties, including 200 brokerage firms, 391 broker-dealer affiliated agents, as well as 193 investment advisers and 434 investment adviser representatives. In addition, state securities regulators initiated 738 actions against unregistered actors, a 15% increase from 2018.
Notably, the report also highlights NASAA’s ongoing prioritization of stopping fraud against seniors. To date, 28 jurisdictions have reported enacting rules or legislation based upon NASAA’s Model Act to Protect Vulnerable Adults from Financial Exploitation. This model act mandates reporting to a state securities regulator and adult protective services agency when “certain financial services professionals have a reasonable belief that financial exploitation of an eligible adult has been attempted or has occurred.” Additional information on the model act can be found here.
Further, NASAA’s 2020 Enforcement Report addresses concerns with unregistered securities. As a general rule, issuers must register securities with federal and state regulators before selling those securities to the public. However, Regulation D under the Securities Act of 1933 (Reg D), provides an offering exemption that permits issuers to sell securities without complying with state and federal registration requirements. Because of the lack of meaningful oversight inherent to so-called private placement offerings, the NASAA report notes numerous continued instances of misconduct associated with Reg D offerings. Specifically, 2019 data suggests that state securities regulators opened 275 investigations and initiated 144 enforcement actions concerning Reg D offerings. This includes 59 enforcement actions related to Rule 506(c), which permits issuers to publicly advertise unregistered securities, provided that the issuers limit their sales to accredited investors.
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 may contact us at (201) 771-1115 or info@gialawgroup.com for a no-cost and confidential consultation.