Highlights from NASAA's 2023 Enforcement Report

By WebCE
Mar 15, 2024

Highlights from NASAA's 2023 Enforcement Report

Each year, the North American Securities Administrators Association (NASAA), an international organization representing state and provincial securities regulators, releases an Enforcement Report. Based on responses from securities regulators in 48 U.S. states and territories, these annual reports offer insights into common schemes and emerging trends to defraud the public.

NASAA shares this information to help raise awareness of fraudsters’ schemes and support financial professionals’ role in protecting the public. In offering this advice, NASAA often refers to its members as “cops on the beat.”

NASAA’s 2023 Enforcement Report (based on 2022 data) sees the emergence and adoption of new technologies, including digital assets and products marketed online and through social media. This year’s responses also note a high enforcement rate against investment advisors and investment adviser representatives (IARs) subject to investigation. Get the full breakdown below.

Digital Fraud Threats Spread Throughout the Internet and Social Media

Digital Assets

In 2022, state securities regulators opened more investigations into digital assets than any other product. The number of investigations involving social media and internet scams jumped to 172 cases in 2022, up from 127 cases in 2021. Enforcement actions also revealed a trend toward digital assets, again the highest of any other product in 2022, with 125—a 30% increase from 2021.  digital asset fraud has seen a steady, significant rise in the past few years, from 125 investigations in 2020 to 214 in 2021 and 357 in 2022.

Securities regulators in  the U.S. and Canada coordinated several investigations of large, complex businesses accused of concealing significant risks associated with products tied to digital assets. Digital asset investigations often dealt with selling investments in interest-bearing accounts also called “earn accounts” or “crypto savings accounts.” The investigations found certain earn accounts were being marketed as the cryptocurrency equivalent of traditional savings accounts offered by regulated banks and credit unions.

Social Media and the Internet

Fraudulent schemes on social media and the internet continued their rise, with a 34% jump in investigations over the previous year—from 127 in 2021 to 170 in 2022—resulting in 65 enforcement actions. Those 65 enforcement actions were more than those involving stocks and equities (61), real estate (36), and oil and gas investments (15).

NASAA highlighted one common scam that tries  to capitalize on social media’s  popularity and success; convincing investors to support a newly launched  social media platform. The Indiana Securities Division helmed an investigation into this scheme, which  resulted in the fraudster receiving a maximum sentence of 12 years in prison.

Older Investors Targeted by New Schemes

Financial scammers target older investors who have accrued wealth over their lifetime.  Last year, 1,814 complaints of alleged misconduct were made to state regulators, who opened 680 investigations and filed 133 enforcement actions in cases involving at least one older investor.

While these scams continue, NASAA’s responses signaled a shift in how older investors are targeted. In 2022, state securities regulators cited social media and internet scams (134) and digital assets (61) as the top two issues in investigations involving older investors.

NASAA also reports a 36% increase in fraud involving self-directed individual retirement accounts (SDIRAs) and precious metals compared to 2021. Amid inflation and economic uncertainty, bad actors have been looking to lure investors to sell specific stocks and use their proceeds to invest in the stability of precious metals. Often, scammers entice investors to open an SDIRA with a qualified custodian, described as an independent, objective, regulated third party working to protect clients. In short, to convey a false sense of legitimacy.

NASAA notes a case from Hawaii, where one such bad actor promised a 900% return on a $174,500 investment in a gold mine. Instead, the principal was used for the bad actor’s personal purposes. Eventually, the bad actor was caught, barred from the industry, and required to pay full restitution in addition to a $250,000 administrative penalty.

High Enforcement Actions Against Investment Advisors and IARs

In addition to conducting investigations into wrongdoing, state securities regulators  promote compliance among registered parties as gatekeepers for capital markets. Part of this role involves inspecting the books and records of broker-dealers and state-registered investment advisers to ensure compliance with laws designed to protect investors and instill confidence in the integrity of the markets.

Nearly 1,000 investigations were opened into registered parties, including 522 (55%) investigations of broker-dealers and 422 (45%) into investment advisors and investment advisor representatives (IARs). Although 55% of investigations involved broker-dealers, investment advisors and IARs received 73% of the enforcement actions taken against registered parties. Investment advisors and IARs faced 271 enforcements, while broker-dealers only faced 98. The most commonly cited violations related to books and records (53), supervision (43), and cybersecurity (13).

IAR Continuing Education from WebCE

The securities industry is complex and requires constant vigilance and precision. As we’ve seen, state regulators will not hesitate to investigate and take action against any unscrupulous securities professional. One of the ways NASAA attempts to prevent this from happening in the first place is by requiring IAR CE. This continuing education is designed to inform all securities professionals of the core responsibilities and how compliance continues to adapt to the latest changes in the industry.

With award-winning securities professionals on our team, WebCE is your trusted source for IAR continuing education and securities exam prep.