State regulators see uptick in actions against RIAs

Since states took on the oversight of advisers with $100 million or less in assets, state securities regulators have seen an increase in actions against registered investment advisers, exposing flaws in those advisers’ compliance.
“State actions against investment advisers are up due to more oversight by state regulators,”` said Joseph Borg, director of the Alabama Securities Commission.
Last year, states expanded their oversight of registered investment advisers from those with $25 million in assets to those with $100 million or less. Previously, the Securities and Exchange Commission was responsible for examining those advisers.
Investment advisers now account for 23.9% of regulatory actions by states, while broker-dealers account for 29.2%, said Mr. Borg, who spoke Friday in Orlando, Fla., at the annual meeting of the Public Investors Arbitration Bar Association’s lawyers.
Individuals who are not licensed to sell securities account for the most actions by the states, 42.5%, while insurance agents account for 4.5%.
Mr. Borg said he did not know the exact number of state actions last year against investment advisers, but he said that the increase “would not be an insignificant amount.” He added that the broad industry shift to investment advisers from broker-dealers, which include so called “breakaway brokers,” made the increase in state actions against advisers inevitable.
Jeffrey Kruske, general counsel for the Kansas Office of the Securities Commissioner, concurs with Mr. Borg. Advisers “are leaving the structure of a large investment adviser or broker-dealer,” Mr. Kruske said.
Advisers lack the compliance support that a back office of a large financial institution provides, he said. “This goes on to present problems. They are solo practitioners with no back office. They may not be doing wrong but need to be reminded of the rules.”
A key that Kansas exams are revealing is supervision, Mr. Kruske said. “Who is supervising that solo investment adviser?” he asked. He had the experience recently of examining a solo adviser’s business and found that the adviser had invested all his clients in inverse exchange-traded funds, a product type that has drawn intense scrutiny from regulators because of advisers’ lack of understanding of them.
“I know his prior broker-dealer would not have allowed him to sell any of those,” Mr. Kruske said.