© 2020 Arizent. All rights reserved.

State regulators take aim at RIAs — broker-dealers, not so much

Register now

State securities regulators have their sights trained on RIAs, with enforcement actions last year seeing major increases compared to previous years as well as those brought against broker-dealers, according to a new report from the North American Securities Administrators Association.

NASAA's annual enforcement report also highlighted a sharp uptick in the number of cases brought against unregistered individuals and firms.

All told, NASAA's U.S. members brought enforcement actions against 377 advisor firms and representatives last year, a 32% increase from 2016. In contrast, the 270 enforcement actions that state regulators brought against broker-dealers and their reps amounted to an 11% decline from the prior year.

For the three preceding years, enforcement actions among NASAA's U.S. members were roughly evenly split between RIAs and brokers, according to the report, with brokers accounting for just slightly more than half of the cases brought. But in 2016, state regulators began reporting a spike in the number of RIAs under investigation, culminating in a surge of enforcement cases brought the following year.

As for unlicensed firms and individuals, states brought 675 enforcement cases against last year, a 24% increase from the year before.

All told, last year's state enforcement actions resulted in at least $486 million in restitution paid back to investors -- more than twice the 2016 figure -- and possibly far more, as not every state reports a restitution total. Fines and penalties, meanwhile, saw a sharp year-over-year decline, with NASAA members levying just $79 million in payouts in 2017, down from a high mark of $682 in 2016.

In a statement, NASAA President Michael Pieciak says that they survey results highlight the "critical role" that state regulators play "in protecting investors and holding securities law violators responsible for the damage that they cause to individual investors specifically and to the integrity of our capital markets in general."

The reason behind the heightened scrutiny of RIAs is harder to pinpoint. "It's really hard to say why exactly the number of actions against IAs increased," NASAA spokesman Bob Webster writes in an email. "A lot depends on the enforcement priorities of each jurisdiction."

State authorities could have consciously shifted their oversight activity toward the growing advisory space, as the SEC has done at the federal level. NASAA also undertook a coordinated advisor exam program in 2017, which could have led to an increase in the total number of firms examined, Webster suggests.

"This is just one plausible explanation, though," he says. "I think the 'correct' answer is that we don't know."

For reprint and licensing requests for this article, click here.