“Now that state regulators are getting involved, advisors have a much greater likelihood of enforcement actions,” Todd Cipperman, who heads a Wayne, Pennsylvania-based law firm for the investment management industry, told Financial Planning.
States now have primary regulatory responsibility over investment advisors with less than $100 million in assets under management. As Cipperman points out, investment advisors with between $25 million and $100 million in AUM have had to transition to state registration pursuant to the Dodd-Frank Act. “The states also have jurisdiction over the sales practices of SEC-registered advisers and state-licensed representatives,” he said.
According to Cipperman, the number of criminal cases brought by state regulators also has increased significantly, along with a rise in prison sentences. NASAA has said that its members examining investment advisors will focus on "both compliance in the firms' general business practices and advice to clients." As NASAA puts it, “As the states implement regular examination schedules and analyze investment advisors that have not been audited in many years, more problems are likely to be discovered.”
What problems are most likely to draw fire from state regulators? “Those relating to sales practices,” Cipperman said. “Suitability and disclosure probably will be major issues; private offerings are likely to get a great deal of scrutiny.”
For investment advisors, thorough diligence is probably to best way to avoid severe problems with regulators. “Look carefully at any investment product you offer,” Cipperman said. “Look at individual clients, too, to see whether a particular product is right for them.”
Among “new threats” listed by NASAA, “inappropriate advice or practices from investment advisors” was in second place, just behind “crowdfunding & Internet offers” and ahead of “scam artists using self-directed IRAs to mask fraud.” Besides the 399 actions against investment advisor firms, NASAA also reported 359 actions against registered broker-dealers, 297 actions against registered broker-dealer agents, and 151 actions against investment advisor representatives.