InvestmentNews Editorials

Increase of enforcement cases against RIAs, advisers suggest compliance may need a boost

State actions against advisers outpaced those against brokers in 2017

Nov 3, 2018 @ 6:00 am

When it comes to stereotypes about advice industry participants, investment advisers often wear the white hats. But the 2018 enforcement report from state securities regulators may put a dent in that image. The report shows that in 2017, for the first time, state enforcement actions against investment advisers outpaced those against brokers.

According to the North American Securities Administrators Association, there were 377 state enforcement actions last year that named investment advisers and RIA firms, up 32% from 2016, while 270 actions named registered representatives and their brokerages, down 11% from 2016.

Advisers' image as the good guys has been disputed before, most notably by former Securities and Exchange Commission member Daniel Gallagher, who argued back in 2014 that if the SEC monitored investment advisers as closely as it did brokers, it would find the same number of bad actors.

(More: 7 ways states got tough with unregistered individuals and firms in 2017)

"It is impossible to separate the fact that we find many more broker-dealer violations than investment adviser violations from the fact that, thanks to the assistance of the SROs, we examine a greater proportion of broker-dealers than investment advisers," Mr. Gallagher said in a speech, referring to the Financial Industry Regulatory Authority Inc.'s role.

Of course, some of the change in enforcement statistics may just reflect the relative numbers of RIAs and brokerages; the number of RIA firms is on the rise, while the number of brokerages has been declining.

Moreover, in recent years, more of those RIA firms have come under state oversight. A provision in the Dodd-Frank financial reform law moved RIAs with less than $100 million in assets to oversight by their state regulator versus the SEC. Previously, the states had regulated firms with less than $25 million in assets. The number of state-registered advisory firms grew 21%, from 13,799 in 2008 to 17,534 in 2017.

Another possible factor driving the rise in enforcement actions could be RIA firms' sometimes less-stringent compliance efforts. In InvestmentNews' story about the NASAA statistics, senior reporter Mark Schoeff cited securities attorney Eleonora Zlotnikova's observation that smaller RIAs are likely to have much less robust compliance operations than broker-dealers.

The NASAA annual report also shows the extent to which fraudsters prey on seniors; state regulators took enforcement actions last year involving more than 1,100 senior victims.

The report noted that 18 states have enacted versions of NASAA's model rule aimed at protecting seniors from financial exploitation. The legislation mandates that advisers and representatives report to regulators if they spot an attempt to defraud a vulnerable adult. The states with the law in place have received more than 500 reports, according to NASAA, and those reports led to investigations and enforcement action.

To the extent that RIA firms are heavily involved in retirement advice, the push to end financial abuse of older people could increase their exposure to enforcement actions.

No matter what underlying factors may have influenced the numbers in NASAA's report, the fact that state enforcement actions against advisers jumped almost a third in just a year should serve as a wake-up call.

Advisers and RIA firms should be reassessing their compliance efforts to be sure they're running a tight ship and be willing to invest some money to upgrade compliance if they realize it's subpar. They should be keeping an eye out for the types of infractions regulators are likely to focus on. And they should be aware of the possibility of financial exploitation when working with older clients and report it promptly when they spot it.


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