Regulation And Legislation

RIA enforcement cases double: NASAA

State regulators brought almost twice as many enforcement actions against registered investment advisory firms last year as in…

State regulators brought almost twice as many enforcement actions against registered investment advisory firms last year as in 2010. They expect to bring even more cases this year, now that about 2,400 advisory firms previously overseen by the SEC have come under their purview.

Preliminary figures show that states reported about 400 actions against advisory firms in 2011, compared with 208 the year before, according to the North American Securities Administrators Association Inc. The actions included those related to providing financial advice to clients, as well as compliance violations.

Regulators have increased their scrutiny of investment advisers in the wake of the Bernard Madoff Ponzi scheme.

States also began to take a closer look at advisory firms last year in preparation for midsize advisers' moving to state oversight this year. The Dodd-Frank financial reform bill required about 2,400 advisers regulated by the Securities and Exchange Commission (those with fewer than $100 million in assets) to move to state regulation.

State agencies said that the switch would probably further raise the number of actions they take against advisers this year.

LACK OF EXAMINATIONS

“A lot of midsize advisers haven't been examined by regulators in many years, and in some cases not ever,” said Missouri Securities Commissioner Matt Kitzi, chairman of NASAA's enforcement section. Increased examinations by state regulators are likely to uncover even more problems at advisory firms.

In the end, he said, additional examinations and enforcement actions will benefit investors.

“States have always been interested in brokers,” Mr. Kitzi said. “The state actions against investment advisers have nearly doubled, and that's significant.”

Nevada saw an increase in en-forcement actions against investment advisers, said state Securities Administrator Diana Foley. She said her staff tried to keep up-to-date with examinations last year in anticipation of having more advisers to oversee this year.

Final state numbers on enforcement efforts in 2011 won't be available for another month or two. In 2010, states brought a total of 3,475 actions against unregistered securities dealers, brokers, investment advisers and insurance agents. About 12% of the actions were taken against investment advisers.

Federal regulators, who received withering criticism from Congress for failing to detect the Madoff scheme, which bilked investors out of $65 billion, also have increased enforcement against investment advisers. The SEC brought a record 146 actions against investment advisers during fiscal 2011, a 30% increase over 2010.

The rise in state actions caused NASAA to warn investors last week that they should be on the lookout for inappropriate practices on the part of advisers, including poor advice, failure to honor their fiduciary duty and, of course, fraud. Some of the compliance issues that states are seeing include problems with undercapitalization, maintenance of client records and marketing violations.

The warning was issued last week along with the release of NASAA's annual list of new and persistent threats to investors. Other new products or practices about which investors should be particularly wary include Internet fundraising, also called crowdfunding, use of self-directed IRAs to hide fraud, and investment-for-visa schemes that prey on foreigners.

Oldies but goodies on the list include bogus investments in gold and other precious metals, risky oil-and-gas-drilling programs, promissory notes, real estate investment scams, fraudulent private offerings, and unlicensed salespeople giving liquidation recommendations.

Financial advisers said that while they hope regulators' scrutiny of advisers roots out the bad apples in the business, it seems as if regulators' focus often is on technicalities, as opposed to fighting abuses.

“I understand why they need to do the things they do, but I have a sense they are looking at the trees instead of seeing the forest,” said adviser Barry Korb of Lighthouse Financial Planning LLC. RIAs adhere to the principles underpinning the fiduciary standard, he said, but regulators often take a rules-based approach to enforcement.

Marty Kurtz, an adviser with The Planning Center Inc., said he recognizes that regulators feel pressure to look harder at financial advisers. His firm hasn't been examined in recent years, but it does conduct mock audits to help prepare for the future. “This is just the new world planners live in because of Madoff,” he said.

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