Reviewing The 2023 NASAA Enforcement Report
Earlier this year, the North American Securities Administrators Association (NASAA) released its 2023 Enforcement Report, revealing the actions taken by state securities regulators in 2022 to safeguard investors and maintain integrity in the financial markets. Because NASAA must compile data from numerous individual state and provincial authorities, aggregating US state and Canadian enforcement data takes substantial time. Nonetheless, the report identifies the areas of greatest concern for US state and Canadian regulators:
Digital Assets/Crypto Currency: In 2022, state securities regulators opened 357 investigations involving products tied to digital assets – a significant increase from the 214 investigations opened in 2021 and the 125 investigations opened in 2020. States also filed 125 enforcement actions involving digital assets – a significant increase from the 89 enforcement actions filed in 2021 and the 52 enforcement actions filed in 2020. According to the report, digital assets are now the most common asset class under scrutiny and will continue to be investigated aggressively in 2024.
Social Media and Internet Schemes: In 2022, state securities regulators opened more than 170 investigations that involved the use of social media and the Internet, a significant increase from the 127 total investigations reported the previous year. They also reported 65 enforcement actions tied to social media and the internet – more than the number of enforcement actions involving stock and equities (61), real estate (36), and oil and gas investments (15).
Broker-Dealer and Investment Adviser Recordkeeping: In 2022, state regulators conducted nearly 1,000 investigations of registered parties, including 522 investigations of broker-dealers and agents and 422 investigations of investment advisers and investment adviser representatives. Although they opened more investigations of broker-dealers and agents, state regulators actually filed a greater number of enforcement actions against investment advisers and investment adviser representatives (271) than broker-dealers and agents (98). The most commonly cited violations related to books and records (53), supervision (43), and cybersecurity (13).
Protection of Elderly Investors: In 2022, state securities regulators fielded 1,814 complaints of alleged misconduct perpetrated against older investors. In that year, the responses to the survey cited social media and internet scams (134) and digital assets (61) as the top two issues in investigations involving older investors.
Responses to a recent poll of NASAA members indicate that investment activity tied to digital assets and social media/internet promotions will continue to be the top threats throughout 2024. In addition to investments tied to digital assets, and internet/social media schemes, state securities regulators expressed concerns about affinity frauds, commodities and precious metals, and promissory notes.
Given the results of this report, and the data collected by NASAA polling state securities agencies, the following compliance procedures will be critical to avoiding unnecessary complications with regulatory audits and investigative actions:
Enhance Policies for Due Diligence of Approved Products: Broker-dealers and registered investment advisers must take caution to update procedures for determining those investment products available to customers. Brokers and RIAs have a duty to determine whether products available or recommendation to customers are suitable generally, and are in the best interest of the specific customers to whom the products are recommended. Given the scrutiny of digital assets, brokers and RIAs must take particular care to understand the specific nature, risk, and suitability of any digital assets recommended or otherwise held in customer accounts.
Enhance Advertising and Social Media Policies and Procedures: Internet and social media posts by registered and supervised personnel represent substantial compliance risks to firms. These posts may constitute advertisements of broker and RIA services, which may violate state securities rules on public communication. Firms should be diligent in monitoring supervised persons’ social media and internet activity when discussing securities and advisory business, and should review all website and social media sites used by the firm to confirm compliance with public communication restrictions.
Books and Records Review: Compliance with product suitability procedures and advertising restrictions may only be confirmed by documented reviews, conducted in sufficient intervals (monthly, quarterly, annually) and exceptions or violations should be recorded in compliance files to demonstrate the remedial actions taken and the evaluation of potential harm to customers and the investing public.
For more detailed information concerning these enhanced policies and procedures, as well as helpful hints for updating and enhancing compliance practices, visit the resources section of our website.
