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RIA Compliance Insights from the 2018 NASAA Enforcement Report

Posted by RIA in a Box

Oct 16, 2018 11:08:00 AM

NASAA_Enforcement CasesOn October 10, 2018, the North American Securities Administrators Association ("NASAA") released its 2018 enforcement report which summarizes securities industry enforcement actions at the state level across the country. The report looks at actions take against broker dealer firms and individual registered representatives, registered investment adviser ("RIA") firms and individual adviser representatives, and unregistered firms and individuals. This most recent annual report details 4,790 investigations leading to 2,105 enforcement actions overall across 51 jurisdictions at the state level. While the report shows that more enforcement actions were taken against unregistered individuals and firms compared to registered broker dealer and RIA firms, there are still relevant insights for RIA firms to review in order to help improve their compliance programs.

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Increased Enforcement Actions Against RIA Firms

The report notes this was "the first year in which investment adviser ("IA") firms and representatives significantly outnumbered broker-dealer ("BD") firms and agents as respondents in state enforcement actions." In 2017, there were 377 enforcement actions taken against RIA firms and individual representatives compared to 270 enforcement actions taken against BD firms and individual agents. Compared to 2016, RIA-related enforcement action was up 32% while BD-related enforcement action declined by 11%.

Given the increasing number of new RIA firms coupled with a declining number of BD firms, it's quite possible this trend will continue for years to come. As such, the Chief Compliance Officer ("CCO") needs to continue to ensure that compliance programs and are being designed and implemented to help prevent activity which could lead to potential enforcement action. In particular, CCOs should also pay close attention to new and emerging regulator focus areas.

Focus on Senior Protection

Since the release of the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation on January 22, 2016, states across the country have continued to focus on the protection of elder adults. In addition, the Securities and Exchange Commission ("SEC") listed "senior investor and retirement accounts and products" as a 2018 investment adviser examination priority. This latest NASAA report shows unregistered securities are currently the greatest type of fraud targeting senior investors. 

RIA firms should strongly consider adopting specific policies and procedures to help ensure that common senior investor compliance issues such as diminished capacity and elder financial abuse are being properly addressed. As clients reach a certain age, the effects of diminished capacity may begin to impact financial capacity and also leave senior investors more vulnerable to potential fraud.

Crypto-Assets and Fraudulent Initial Coin Offerings 

As RIA compliance consultants, we have long stressed that investment advisers should exercise great caution as it relates to cryptocurrencies. In addition, the SEC also included "cryptocurrency, initial coin offerings ("ICOs"), secondary market trading and blockchain" as a 2018 RIA examination priority. Similarly, the report notes, "NASAA members recognize that bad actors often attempt to capitalize on the hype associated with exciting new markets and trendy financial products."

During 2017, "NASAA members began conducting swift investigations of suspect ICOs and other investments involving cryptocurrencies, and they started pursuing those enforcement actions necessary to protect the investing public from imminent harm." It's likely that this enforcement trend will continue in future years as crypto-assets and related products continue to grow in popularity. As a regulatory compliance best practice, investment advisory firms should generally avoid such offering and providing advice on cryptocurrency-related products.

Be sure to check back soon as we continue to provide more detailed data and information on RIA regulatory compliance enforcement focus areas and trends.

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RIA in a Box LLC is not a law firm, investment advisory firm, or CPA firm. RIA in a Box LLC does not provide legal advice or opinions to any party or client. You should always consult your relevant regulatory authorities or legal counsel if applicable.

Topics: RIA Compliance

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