State Securities Regulators Earning Their Keep In Protecting Investors

Posted on January 4th, 2011 at 1:47 PM

NASAA (the North American Securities Administrators Association) recently published its 2010 Enforcement Report (the “Report”).  NASAA, organized in 1919, is the oldest international organization devoted to investor protection.  It is a voluntary association with a membership consisting of securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Mexico.

The Report demonstrates that those securities regulators associated with NASAA serve an important role in protecting the interests of investors.  Often overshadowed by the SEC (Securities and Exchange Commission) and FINRA (the Financial Industry Regulatory Authority), NASAA members have a significant history of bringing enforcement actions, including criminal prosecutions.  Undoubtedly, there continues to be a significant role for NASAA, and more particularly state regulators in the United States, regardless of the accomplishments of the SEC and FINRA and despite calls from Wall Street and some members of Congress to curtail or to eliminate the investor protection role of NASAA members.

                Let’s examine the key accomplishments of NASAA as contained in the Report.


                The Report lists several highlights.  They are:

  • State securities regulators conducted more than 4,000 investigations during the 2010 reporting period;
  • Nearly 3,500 enforcement actions were reported by the states, including more than 1,100 criminal actions;
  • The reported enforcement actions for the year represent a 51% increase over the total enforcement actions reported in the previous year;
  • States levied fines or penalties in excess of $170 million.  States ordered more than $14 billion in investor restitution, and enforced the actual, reportable return of more than $12 billion;
  • State regulators took action to remove or bar unscrupulous actors from the licensed community.  More than 3,200 licenses were withdrawn, denied, revoked, suspended or conditioned due to state action;
  • More than 1,100 years of jail time;
  • The majority of fraud cases featured unregistered individuals selling unregistered securities.  Nearly 900 reported actions involved unregistered securities, and almost 800 actions involved unregistered firms or individuals; and
  • States reported nearly 1,000 actions involving abuse of senior citizens.


Types of Cases

                During the reporting period, more than 1,000 state enforcement cases involved fraud, which the Report states as being “traditionally marked by material misrepresentations, false statements or a scheme designed to defraud or deceive an investor.”  The Report states that the majority of those fraud cases featured unregistered individuals selling unregistered securities.  Compared to the previous year, securities fraud violations increased 10% nationwide, unregistered securities violations increased 9%, and unregistered firms/individuals rose a significant 24%! 

                In addition to fraud cases, cases involving unregistered securities, and cases involving unregistered firms/individuals, the states took other actions.  For example, more than 350 cases were reported involving dishonest or unethical activity by a licensed firm or individual.  Another 225 cases were brought in connection with failure to supervise violations.  Nearly 200 actions involved unsuitability of investments.  Additional violations were: books and records violations; unauthorized trading; selling investments away from the employing firm; and churning.

                In terms of the respondents involved in those violations, the Report reveals that the majority of participants (427) were broker-dealer firms.  Broker-dealer agents were second largest (264), followed by investment adviser firms (208), investment adviser representatives (146) and insurance agents (143).  Furthermore, the Report states, “Firms and individuals operating on the fringes of the securities industry also were the focus of hundreds of state enforcement efforts.”  The Report lists two categories.  First, the Report states that, “Insurance agents, often also registered as securities agents, or their firms were parties to 143 enforcement actions in 20 states.”  Second, the Report states that, “Actions against finders or solicitors were reported in nine states, and seven states reported actions specifically involving individuals representing themselves as financial planners.”

Types of Products

                The Report reveals that Regulation D (Rule 506 private placement securities) offerings and real estate investments were the most frequent source of cases handled by NASAA members.  Following those top two types of products, the most reported products for 2010 were:

  • Oil and gas investments or interests;
  • Structured products;
  • Hedge funds or private equity funds;
  • Variable annuities;
  • Viaticals or life settlements;
  • Precious metal commodities;
  • Non-precious metal commodities; and
  • Equity indexed annuities.

The Report observes that this list is “no surprise” as those products have been problematic “for years.”

Enforcement Trends, Traps and Threats for Investors

                NASAA administrators were asked to identify the top five trends or developments most relevant in their states in terms of securities enforcement actions.  In response, they identified many of the types of products appearing above.  In addition, however, “promissory notes and variable annuities are trending products threatening to trap investors.”  Also cited were the following: affinity fraud; foreign exchange trading; gold and precious metals; Ponzi schemes and viaticals/life settlements.

                Likewise, for 2011 NASAA has identified the following “Top Investor Traps and Threats”.  In terms of products, they are:

  • Distressed real estate schemes;
  • Energy investments;
  • Gold and precious metals;
  • Promissory notes; and
  • Securitized life settlement contracts.

In terms of practices, they are:

  • Affinity fraud;
  • Bogus or exaggerated credentials;
  • Mirror trading;
  • Private placements; and
  • Securities and investment advice offered by unlicensed agents.

Given the traps and threats that confront investors, and NASAA’s long history of being a regulator protecting the interests of investors, NASAA is, and should be, a regulator here to stay!  The Report should leave no doubt in that regard on the minds of Wall Street and certain members of Congress.


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I want to extend a tremendous thank you for your dedication, professionalism, hard work and patient demeanor through this challenging time. It was enjoyable interacting with everyone on your team, this certainly helped while dealing with the situation and working towards resolution.

Dan M.


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