Key Drivers Behind State Securities Enforcement Actions
State regulators play a pivotal role in maintaining the integrity of the securities industry, particularly when it comes to protecting retail investors. While federal agencies like the SEC often garner more attention, state securities regulators serve as critical front-line enforcers of compliance and ethical standards within their jurisdictions. Through targeted enforcement actions and oversight, state regulators address misconduct that can often slip through the cracks at the national level, ensuring that investment advisors and firms adhere to both state and federal regulations.
In its latest report, the North American Securities Administrators Association (NASAA) identified breach of fiduciary duty and failure to register as recurring themes among enforcement actions initiated by state regulators in 2023. The data, drawn from state-level actions, provides critical insights into the types of misconduct that continue to attract regulatory scrutiny within the investment advisory space.
According to the report, the number of state-registered investment advisors decreased slightly to 16,897, reflecting a net reduction of 166 firms from the previous year. This reduction signals not only a shift in the market but also the ongoing regulatory challenges that firms face in maintaining compliance with evolving standards.
Top Causes of Enforcement Actions
Among the most frequently cited violations leading to enforcement actions—whether litigated or settled prior to a hearing—were:
Failure to register as an investment adviser
Failure to register as an investment adviser representative
Fraud
Inadequate compliance policies and procedures
Breach of fiduciary duty and failure to disclose conflicts of interest
Improper fees
Violations of existing policies and procedures
Suitability violations
Failures related to equities, ETFs, private placements, and non-disclosure of disciplinary actions
Client Focus and Compensation Models
The NASAA survey also highlighted trends in client demographics and compensation structures among state-registered firms. A majority of these firms (74%) serve retail investors, with 18.9% focusing on high-net-worth clients. Notably, 84.3% of firms operate on a fee model that charges a percentage of assets under management, while a significant 94.7% of firms are registered as investment adviser representatives.
This report serves as a reminder of the heightened vigilance regulators maintain regarding core compliance obligations, and the importance for firms to address potential conflicts of interest, ensure accurate registration, and maintain robust compliance frameworks to mitigate enforcement risks.
* * *
Attorney Advertising—Anderson P.C. is a U.S. law firm and provides this information as a service to clients, prospective clients, and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.
Anderson P.C. is a U.S. law firm dedicated to defending clients in government investigations and securities enforcement actions initiated by the SEC, FINRA, DOJ, and other regulatory bodies. We provide focused, strategic counsel and regulatory guidance across the full spectrum of federal laws and regulations affecting broker-dealers, investment advisers, banks, asset managers, private funds, public companies, senior executives, and digital assets. Our deep expertise allows us to navigate complex legal challenges and deliver results-driven solutions tailored to our clients' unique needs.
If you have any questions or need legal assistance related to government investigations, securities enforcement actions, or regulatory compliance, please don't hesitate to contact us. Our team at Anderson P.C. is here to provide the expert guidance and support you need to navigate these complex challenges.
