All posts tagged NASAA

The North American Securities Administrators Association (NASAA) recently released its Enforcement Report for 2016, an annual publication providing a general overview of the activities of the state securities agencies responsible for the protection of investors who purchase investment advice or securities. Admittedly, the information undercounts many statistics due to differences in fiscal year reporting and a lack of response or underreporting for each survey question posed. However, trends in the 52 U.S. jurisdictions are still apparent in the report.[i]

 

For the first time since NASAA began tracking enforcement statistics, more registered than unregistered individuals and firms were subject to respondent status.[ii] During 2015, state securities regulators conducted 5,000 investigations and brought 2,000 enforcement actions against 2,700 respondents, which often involved more than one individual or company.[iii]

 

Sanctions imposed upon those who were found in violation of securities law ranged from incarceration to monetary relief and bans on trading. The year witnessed a combined 849 years of imprisonment, 410 years of probation, and 23 years of deferred prosecution, as well as $538m paid in restitution and $238m in fines/penalties.[iv] In addition to criminal and monetary repercussions, revocation and disbarment from the industry occurred for more than 250 individuals, while another 475 licenses/registrations were denied, suspended or conditioned.[v]

 

The five most common violations prompting these actions were, in order of frequency: Ponzi Schemes, Real Estate Investment Program Fraud, Oil & Gas Investment Program Fraud, Internet Fraud, and Affinity Fraud.[vi]

 

The NASAA report found that Ponzi scheme victims were often targeted through the internet or for identifiable attributes, such as race or religion. The report also found that vulnerable seniors were disproportionately victims; jurisdictions that reported on seniors found one-third of all investigations related to their victimization.[vii]

 

Prison terms have become more common for those conducting such schemes, such as Derek Nelson, found guilty of selling about $37m in promissory notes for property purchases that never took place. As a consequence, Mr. Nelson received 19 years in prison.[viii]

 

Real estate and oil and gas investment fraud was also a major concern for reporting NASAA members. Some states, such as Colorado, have sought judicial remedy and have secured investor protection by winning the right to have oil and gas interests subject to securities law.[ix]

 

The report clearly states that all fraud has been made easier to accomplish due to the internet, where only basic computer skills allow an individual from anywhere in the world to “enter” the homes of investors. Scott Campbell was sentenced to 20 years in prison for conducting a Ponzi scheme over the internet from Florida. Alabama garnered 18 convictions in an international bank scheme conducted through Craigslist.[x] Affinity frauds, in which an individual purports to be a member of a certain group, are much easier to accomplish given the anonymity of the internet.

 

The industry’s heightened attention to elder abuse has not shielded those responsible for supervision or oversight. Wells Fargo Advisors, LLC and Fulcrum Securities, LLC were ordered to pay $470,000 to investors for their failure to oversee Christopher Cunningham of Virginia, who defrauded elderly clients in a Ponzi scheme. For his part, Cunningham was disbarred and sentenced to 57 months in federal prison.[xi]

 

Attorneys are not immune to abusing their positions in order to perpetrate fraud. According to the report, Michael Kwasnik, an estate planning attorney, used his position of trust to perpetrate a $10m Ponzi scheme against elderly victims in New Jersey. The Court found that he had taken advantage of the attorney-client trust. Earlier in the year, Kwasnik also pled guilty to securities fraud in Delaware, utilizing the client trust account of his law firm to commingle monies from both frauds. Though Mr. Kwasnik received no jail time, he was ordered to repay millions in lost monies, amongst other judgments.[xii]

 

What may be the single worst case of elder victimization presented in NASAA’s annual report was perpetrated by Sean Meadows, owner of a financial planning and asset management firm, Meadows Financial Group LLC (MFG). Meadows perpetrated a $13m Ponzi scheme against 100 individuals, some disabled, poor, or terminally ill. He took the life savings of most, luring them into draining their retirement accounts. Many lost their homes, ability to care for their families, and even pay for cancer treatments.[xiii]

 

Meadows convinced his victims to pull money out of tax-deferred accounts to invest with MFG, promising these transactions would be tax-free rollovers. He then convinced these same individuals to allow him to do their taxes, in order to cover up the scheme. He either filed fraudulent tax returns or filed nothing at all. As a result, in addition to losing retirement savings, many incurred significant tax liabilities. For his crimes, Meadows received 25 years in prison.[xiv]

 

As the NASAA report makes clear, positive steps are being taken by its members to address the fraudulent and criminal activities of some individuals and firms. Laura Posner, NASAA Enforcement Section Chair, believes enhanced regulatory scrutiny is responsible for the increase in action documented by the report.[xv] However, it is still necessary to be on alert for promises that seem too good to be true. If you feel you may have fallen victim, please seek consultation from an attorney immediately.

 

[i] North American Securities Administrators Association (2016) NASAA 2016 Enforcement Report (Based on 2015 Data) [Electronic Format]. Retrieved from: http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2016/09/2016-Enforcement-Report-Based-on-2015-Data_online.pdf. (pp. 11)

[ii] Ibid. pp. 5

[iii] Ibid. pp. 2

[iv] Ibid. pp. 3

[v] Ibid. pp. 4

[vi] Ibid. pp. 4

[vii] Ibid. pp. 5

[viii] Ibid. pp. 6-7

[ix] Ibid. pp. 4-5

[x] Ibid. pp. 7

[xi] Ibid. pp. 7

[xii] Ibid. pp. 9

[xiii] Ibid. pp. 9-10

[xiv]Ibid. pp.  9-10

[xv] NASAA Releases Annual Enforcement Report (9.13.2006) [Electronic Format]. Retrieved from: http:nasaa.org/40256/nasaa-releases-annual-enforcement-report-2

Earlier this month, The Investment Adviser Rep Syndicate interviewed Ms. Patricia Struck, Chair-Person of the Investment Adviser Section for the North American Securities Administrators Association (NASAA) and the Administrator of the Division of Securities of the Wisconsin Department of Financial Institutions.  The interview, relevant to state and SEC registered Investment Adviser Representatives and Registered Investment Advisers is posted below.

 

 

The Syndicate:    Let’s start with the basics – What is NASAA?

Patricia Struck:   The North American Securities Administrators Association is oldest international organization devoted to investor protection. It’s a voluntary association whose membership consists of 67 state, provincial, and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.

 

TS:                   For how long have you been the administrator of the Wisconsin Division of Securities?

PS:                   I’ve been the administrator since 1995.

 

TS:                   What advisers do the states regulate as opposed to the SEC?

PS:                   Generally, the states regulate “small” (with assets up to $25 million) and “mid-sized” (with assets up to $100 million) advisers.  Of the 28,366 advisers currently on IARD, more than 17,000 are state advisers. The rest of the universe – nearly 11,000 advisers – are SEC advisers.

 

TS:                   It is my understanding that NASAA has different “working groups”. Is there a working group  focused on the advisory as opposed to the broker industry?

PS:                   NASAA has “sections” divided into 5 subject matter areas; one of the five is the investment adviser section and another is the broker-dealer section. But while the sections are separate on paper, they work very closely together – especially the investment adviser and broker-dealer section.

 

TS:                   For how long have you been the head of NASAA’s Investment Adviser Section?

PS:                   I just became chair of the section in October of 2013. This is my third term as chair.

 

TS:                   Can you give me some examples of some of the positions held by the folks in this section?  What exactly does this section seek to accomplish and how does it go about meeting those goals?

PS:             The section includes nearly 50 volunteers from across the US and Canada with vast expertise in the whole range of regulatory issues relating to investment advisers. Some are the administrators in their jurisdictions. Some are registration chiefs or lead examiners in their states. Many are examiners who perform exams in advisers’ offices. All have specific subject matter expertise in issues

 

TS:             As you know, the Investment Adviser Rep. Syndicate focuses on the training, compliance, and business goals of the representative rather than the RIA. What observations did you make in 2013 that would be of interest to advisory representatives?

PS:             In 2013, as state securities regulators assumed the increased regulatory oversight of investment advisers managing under $100 million in assets, NASAA released an updated series of recommended best practices that investment advisers should consider to minimize the risk of regulatory violations. These recommendations were based on the sample data reported by examiners in 44 state and provincial securities agencies between January and June 2013. The 1,130 reported examinations uncovered 6,482 deficiencies in 20 compliance areas, compared to 3,543 deficiencies in 13 compliance areas identified in a similar 2011 examination of 825 investment advisers.

As regulators, we are concerned about investor confusion stemming from the blurred lines between traditional brokerage, investment advisory, and financial planning services; partially because of the expectations the brokerage industry has set, and partially because of the marketing approach the industry uses – the proverbial ‘financial adviser’ who is your partner in retirement every step of the way. As long as the broker-dealer industry continues to engage in advice driven marketing the confusion will persist. That’s one reason why state securities regulators have long advocated that broker-dealers must be held to the fiduciary duty standard of care currently applicable to investment advisers and be required to place retail investor interests ahead of their own.

 

TS:             What are the section’s goals for 2014?

PS:             The section always strives to look for ways to enhance uniformity in investment adviser firm and investment adviser representative registration practices. We also will continue our ongoing efforts to support states in conducting investment adviser exams. And of course, we will review our existing “best practices” for IA firms to consider while developing their own compliance programs and evaluate whether additional practice areas are necessary.

 

TS:             How is the migration of RIA’s pursuant to the Dodd-Frank Act going?

PS:             The IA Switch, involving the transfer of more than 2,100 investment advisers from federal to state oversight, was one of the most significant achievements in the history of the North American Securities Administrators Association (NASAA).

The Switch stemmed from Section 410 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which raised the assets under management (AUM) threshold for state regulation of investment advisers from $25 million to $100 million.

This report documents the work that went into the successful completion of the Switch.  http://www.nasaa.org/?s=switch+report

 

TS:             If there were three things you would like to see the Syndicate accomplish what would they be?

PS:             1. Helping IARs have a better understanding of the role of their state regulator

2. Helping to create an ongoing dialogue between the IAR and regulatory communities

3. Helping IARs appreciate investor confusion stemming from the blurred lines between traditional brokerage, investment advisory, and financial planning services – and work to cut through that confusion

 

TS:             What is the one thing you would be grateful to see investment adviser representatives take away from this interview?

PS:                   I would like them to appreciate that we are their partners in putting investors first. State securities regulators are accessible, both to investors and to the people we regulate. We work closely with the IAR communities in our states and appreciate the value and importance of communication. We share the same goal of providing the best level of service to investors. We’re in this together.

January 29, 2014 – NASAA has announced that registration for their 2014 Public Policy Conference is now open.  The conference will be held in Washington, DC on April 8, 2014. David Cosgrove has been going to his conference for years, both as a regulator and as a private attorney.  The conference provides IARs with a great opportunity to interface with regulators on critical policy issues such as the prospect of FINRA becoming the regulator of the investment advisory community. Consider attending the conference for an in-depth look at some key public policy issues facing the investment industry and a networking opportunity. For more information, go to: www NASAA.org.