SECURITIES REGULATORS DISCUSS ENFORCEMENT STATS AND TRENDS

State securities regulators' enforcement efforts were robust in 2010, according to a panel of regulators at NASAA's annual conference last week. Cosgrove Law, LLC provides both civil and criminal representation in the securities and white-collar arena, so it was interested to learn that there was a substantial increase in criminal prosecutions filed by securities regulators in 2010. For “non-fraud” cases, the regulators scored themselves a 32% increase in “failure to supervise” actions, but filed fewer “suitability” actions.

Other interesting statistics: almost half of the state regulators' enforcement actions were brought against non-registered persons in 2010. As for registered individuals, 12% of those actions were brought against investment adviser representatives (IAR's) and 23% were filed against broker-dealer agents. 5% were brought against registered solicitors, and the balance fell upon insurance industry members. The regulators continued to express ire over insurance industry members dually licensed as investment advisers with what they perceive to be an excess concentration or focus upon annuity sales.

Notably, today's Wall Street Journal has an interesting Adviser Alert that shares an important observation: investment advisers are “among regulators' best tipsters.” In our experience, reputable advisers are also likely to recommend legal counsel to new clients whom they observe to have been victimized by their prior broker or adviser or insurance agent. Food for thought.

STATE SECURITIES REGULATORS AT ANNUAL CONFERENCE LIST PRECIOUS METALS SALES AS ENFORCEMENT PRIORITY

Members of this firm, financial industry members, and SEC and FINRA staff joined state securities and commodities regulators at their annual conference this week. As always, the conference agenda was relentless—filled with impressive panels discussing trends and developments on the broker-dealer and investment advisory side, State, Federal and SRO enforcement actions and compliance audits, as well as commodities regulation and international financial market policy. When NASAA's Enforcement Section met during the conference, its leaders listed precious metals retail sales as one of their primary concerns and enforcement priorities. The discussion, however, focused on margin sales, with an additional dose of skepticism about precious metals depository services. Notably, many interpret language in the Dood-Frank Act to preclude most transactions that combine the use of margin and storage, although the precious metals industry still awaits belated CFTC rule-making in this area.

In the interest of full disclosure, Cosgrove Law, LLC is a member of the ICTA and provides compliance services to members of the precious metals industry. Is also, however, represents investors defrauded by the less reputable members of an industry arguably vindicated by years of market appreciation. Indeed, today's Wall Street Journal published one of dozens of articles regarding the role of gold and other metals in the personal finances and portfolios of Americans struggling through another year of economic malaise and equity market volatility. To read this full article, please click here.

COGNITIVE DISSONANCE: STATES WITH EXPANDED INVESTMENT ADVISER REGULATORY RESPONSIBILITIES LIKELY TO RECEIVE STAGNANT OR REDUCED FUNDING

This coming summer over 4,000 mid-size investment advisory firms will fall under the auspices of a new regulator: their home state. No longer will they be regulated by the SEC, which managed to conduct regulatory examinations of less than 15% of the approximately 12,000 investment advisers it regulated in 2010. The Dodd-Frank Act's shift of a segment of this nearly unregulated group was intended to improve this situation. But over one-third of the 4,100 investment advisers making the migration will have a new state regulator with either no regular examination program or with an umbilical cord to one of the worst budget crises in the nation: New York, California, Illinois and Massachusetts. And while the regulatory staffs in each of these states are among the best of the best, the situation begs for an answer better than: “we will be able to handle it.” Not only does this answer strain credulity, it seems to ignore the initial premise behind the regulatory shift and expansion of power advocated by state regulators: that they would improve investor protection by doing more and by doing it better than the SEC in the area of regulatory audits for mid-market advisers.

The current lack of a convincing and comprehensive public answer or plan by state regulators in response to the skeptics left the door open for the brokerage industry's self-regulatory organization to insert its foot. Apparently FINRA has recommended that it, or a SRO sister-to-be-created, should fill the feared void. Trade associations haven't missed the opportunity to join the turf war either, with the Financial Services Institute backing FINRA and the Investment Adviser Association siding with the state regulators. This author for one, has no interest in joining the fray and is confident that the data for a more informed evaluation and decision making process will be available in a year or two.

Assuming the states will find a way to digest the new regulatory burdens on the way, investment advisers should begin preparing for the advent of more frequent exams, audits, follow-up inquiries, remedial plans and enforcement actions. Lest I miss the opportunity for a plug – Cosgrove Law, LLC has experience assisting mid-market advisers with compliance issues, regulatory inquiries and enforcement actions.

For more information, or a different take on what I discussed in this entry, see The Wall Street Journal's January 3^rd article on the issues and NCSL.org.