Legal Alerts

State Regulators Step Up Enforcement Efforts Targeting Registered Investment Advisors


Many of the broad sweeping provisions of the Dodd-Frank financial reform bill have started to take hold, and now, there may be one more. Under the bill, which was signed into law in July 2010, regulatory oversight of around 2400 advisors with assets totaling less than $100 million passed from the SEC to the various states. In part, the move was precipitated by increased pressure on the regulators resulting from the bevy of Ponzi schemes uncovered in recent years and hard evidence that many advisors had not been examined for years—and in some instances never. By all accounts, those days may be over.

According to recent statistics released by the North American Securities Administrators Association, Inc. (NASAA), the regulatory body charged with oversight and coordination of state regulatory efforts, enforcement cases brought against RIA’s have nearly doubled since oversight passed to state agencies over a year ago. Indeed, early figures reflect that around 400 actions were launched in 2011 compared to only 208 in 2010. And these actions stem from allegations of compliance deficiencies and/or advice given to clients. What remains unclear at this point is whether the various state agencies intend to target the same or different issues (i.e. private placements, money laundering, seniors etc.) and what approach they intend to take with review and oversight of the advisors. In the past, some industry pundits have complained of regulators taking too much of a hard and fast rules-based approach to oversight instead of a more practical, risk-based approach better tailored to an advisor’s individual business. One would think that a more tailored exam would lead to better oversight. But in light of ongoing negative publicity and public sentiment concerning past failures to detect fraud and other financial crimes, it is not inconceivable that, at least for the time being, regulators may be targeting low hanging fruit to demonstrate a reinvigorated enforcement effort.

Only time will tell whether these stepped-up efforts will be effective in curbing the Madoff-like schemes that so greatly rocked investor confidence in recent times. But one thing is certain: advisors should now plan to be visited by their local state regulators more than once every decade.

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