State Regulators are Filing More Claims Against Investment Advisers


Investment advisers and their firms are facing increased scrutiny from state regulators following enactment of the Dodd-Frank financial reform act and the high profile press coverage of the Madoff ponzi scheme and other fraudulent activities. The number of regulatory enforcement actions against investment advisers increased by 100 percent in 2011. Regulators are on the lookout for improper practices and advice that may be fraudulent. ( See “State actions against investment firms rise dramatically,” by Liz Skinner, InvestmentNews).

State securities regulators almost doubled the number of enforcement cases brought against investment advisers from 208 in 2010 to 400 in 2011 as a tougher regulatory environment led investigators to focus on inappropriate advice and compliance issues like undercapitalization or unethical marketing practices, which could lead to investor fraud.

State securities officials expect the number of cases against advisers to continue rising this year. Regulators are focusing on the midsize firms that were formerly overseen by the SEC but are now regulated by state securities commissioners, according to the article, citing a statement released yesterday by the North American Securities Administrators Association (NASAA), an organization of state securities regulators.

NASAA recently published its annual list of top ten investment scams. This year, inappropriate practices involving investment advisers was listed as a new threat to investors. NASAA specifically pointed out the importance of investigating the background of anyone offering investment advice or a financial opportunity.
“Investors should insist on working only with licensed brokers and investment advisers in dealing with both traditional and alternative securities investments, and should quickly report any suspicion of investment fraud to their state securities regulator,” NASAA president Jack Herstein, assistant director of the Nebraska Department of Banking and Finance, was quoted as saying.

Regulators will probably uncover even more problems at advisory firms, which will benefit investors, according to Missouri securities commissioner Matt Kitzi, chairman of NASAA’s enforcement section, who reportedly said: “A lot of midsize advisers haven’t been examined by regulators in many years and, in some cases, not ever.”

According to NASAA, investors should be particularly wary of internet fundraising (also known as crowd funding), self-directed individual retirement accounts, which allow exotic investments that may be fraudulent, and investment-for-visa schemes, which masquerade as legitimate investments.

The annual list of top risks also includes investments in gold and other precious metals, oil-and-gas drilling programs, promissory notes, real estate investment schemes, private offerings and liquidation of legitimate investments to fund variable products sold by insurance salesmen, who may not be licensed to sell securities.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.