NASAA Enforcement Report Shows Increased Actions against Investment Advisers (with Parness Comment)

NASAA reported a significant increase in enforcement actions against investment adviser firms last year, with the number of IA enforcement actions nearly doubling to 399 in 2011. Notably, actions against investment adviser firms accounted for 15 percent of all enforcement actions handled by state securities regulators, and Regulation D-Rule 506 private offerings and real estate investment schemes were the most reported products at the basis of enforcement actions for the second consecutive year.

Parness Comment: NASAA's latest Enforcement Report reflects an admirable job by the state securities administrators in policing the securities industry, particularly when one considers that some states operate on shoestring budgets; what may strike terror in the hearts of would-be Bernie Madoffs are the statistics concerning state criminal prosecutions. Note should be made of the "New Threats" and "Persistent Threats" discussed on pp. 9-12 of the Report. Two issues raised by the Report are:(1) Who are the U.S. NASAA members who failed to respond to the 2012 survey? Assuming that there are 51 U.S. NASAA members, including the District of Columbia, does this mean that the three missing jurisdictions brought no enforcement actions and, if so, why not? (2) This report, like NASAA's 2011 Enforcement Report, claims that "Regulation D offerings and real estate investments were the most frequent source of cases handled by NASAA members," that "States brought more than 200 actions involving Rule 506 or Reg D offerings . . . ," and that Rule 506 offerings remain a "persistent threat." While there's no doubt that some offerings which are purported to be made in reliance on Rule 506 (the "safe harbor" exemption from securities registration for private offerings relied on by many hedge funds and other issuers) are effected by fraudulent means or run by persons with nefarious backgrounds, in the absence of any details in the Report as to the nature of the alleged violations, a review of enforcement actions reported on certain states' websites reveals that many of these cases seem to involve technical violations, such as a failure to effect a timely "Form D" notice filing with the SEC and/or the state, and the improper use of general solicitation by the issuer in violation of Rule 506, and not blatant frauds as the Report might lead one to believe. It's also questionable whether these statistics include actions against issuers who sold securities without any thought given to federal or state securities law compliance in what appeared to be private offerings, but which the states have characterized as "Rule 506 offerings." It is notable that NASAA has been on the warpath over Rule 506 offerings for over 16 years now, since Congress has preempted the states from substantive regulation of these offerings.

See: NASAA Enforcement Report. See also: NASAA Press Release.