Bates Research - 05-21-20

NASAA Seeks to Disrupt Fraud, Moves to Online Exams; FINRA Warns of Pandemic Scams

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State and federal regulators are pressing firms to increase vigilance against crisis-related misconduct and other vulnerabilities in order to protect investors. The North American Securities Administrators Association (NASAA) recently took several public steps in response to COVID‑19 challenges, including forming a COVID-19 Enforcement Task Force that will identify and stop the latest potential threats to investors, publishing an on-line jurisdictional resource to track state securities administrator responses to the pandemic (including links to regulatory relief or operational information by jurisdiction).

Meanwhile, FINRA shared some “insights” for investors against the latest fraudulent schemes by issuing a notice advising that firms take “appropriate measures” concerning heightened investor risk during the pandemic. In those alerts, FINRA details the most prevalent scams and recommended practices for both investors and firms to combat them. Here’s a closer look.

NASAA Coronavirus Task Force to Root Out Fraud

According to President and Chief of the New Jersey Bureau of Securities Christopher W. Gerold, the primary objective of NASAA’s new Task Force is to “proactively identify” and “disrupt, discourage and deter” investment fraud and unregistered regulated activities within member jurisdictions. NASAA structured the new Task Force on its successful “Operation Cryptosweep” model. (As Bates previously reported, those efforts led to the opening of more than 330 inquiries and investigations and brought more than 85 enforcement actions relating to ICOs and cryptocurrencies.) Preliminary steps include reviewing some 200,000 coronavirus-related internet domain names linked to the pandemic and identifying those that pose a threat to investors. NASAA states that the Task Force will use “online investigative techniques to identify websites and social media posts.” According to Joseph P. Borg, NASAA Enforcement Section Chair and Director of the Alabama Securities Commission, “fraudsters are ramping up as a result of this crisis … Our goal is to get and stay ahead of the curve.”

NASAA COVID-19 Scam Alert, State Resources and Examinations

Creation of the Task Force comes on the heels of NASAA publishing an investor scam alert, an online resource guide and a corresponding site update that provides useful state-by-state information detailing regulatory relief and current regulatory operations for state government offices. In a statement issued by NASAA, President Gerold said that across jurisdictions, examinations of firms are continuing but have “shifted from on-site to remote, or are being deferred when necessary,” and he also noted that “nearly all states are providing regulatory relief to licensees/registrants adversely impacted by COVID-19.”

FINRA Alerts Investors and Firms to Pandemic-Related Fraud

In twin publications—one for investors and one for firms—FINRA highlights the risks fraudsters present when seeking to prey on investor vulnerabilities exacerbated by COVID-19. In the publications, FINRA urges that stakeholders remain vigilant against attacks. FINRA’s communications warn against four specific scams: fraudulent account openings and money transfers, imposter scams, IT help desk scams, and email compromise schemes.

FINRA also warns that fraudsters can use stolen or synthetic customer identity information to gain access to an account, and once in control can transfer or divert funds from a customer’s account to the fraudster’s account or rapidly remove stolen funds from the brokerage account. For investors, FINRA recommends monitoring accounts for suspicious activity, which may occur in smaller, less detectable money transfers. For firms, FINRA advises managing the risk by strengthening (i) Customer Identification Programs, (ii) opening and ongoing account monitoring, (iii) account verification (and placing restrictions on fund transfers); (iv) clearing firm collaboration, and (v) suspicious activity report processes.

FINRA also cautions that fraudsters can claim to be brokers and can create a fake online presence. For investors, FINRA recommends independent verification of a firm’s contact information, keeping account information private, refusing callers who seek remote access to personal computer or devices, and use of BrokerCheck. For firms, FINRA advises specific staff training and practices as a 2019 FINRA Notice describes on imposter websites.

FINRA additionally warns that fraudsters may claim to represent a financial firm’s IT Help Desk in order to steal personal customer information. For investors, FINRA recommends verification before providing personal or password information, opening links, or downloading attachments (if by email). For firms, FINRA advises additional training, reporting of suspicious calls or activity, and to contact the official IT Help Desk to “confirm the veracity of the original communication.”

In the publications, FINRA further highlights scams involving those authorized to execute legitimate funds transfers. Schemes involve fraudsters posing as firm leaders requesting one or more fund transfers, for example, related to accounts payable invoices. For investors, FINRA recommends confirmation of any requested fund transfers via telephone and viewing any deviations from standard payment practices as red flags. For firms, FINRA advises alerting staff authorized to disburse funds to monitor for red flags and confirm requests via telephone before acting on them. FINRA also advises that firms consider including email “banners” for any communication coming from outside the firm.


NASAA and FINRA’s pandemic-related efforts make clear that the regulators are continually working to address significant issues and impacts of the pandemic to warn and protect both investors and the industry. Bates will continue to keep you apprised of future developments.

The current crisis presents many challenges. Bates practice leaders, consultants, and experts can help.

Please do not hesitate to reach out.

Julie Johnstone, Managing Director, Retail Securities Litigation 

Alex Russell, Managing Director, White Collar, Regulatory and Internal Investigations

Edward Longridge, Managing Director, Bates AML and Financial Crimes 

Robert Lavigne, Managing Director, Bates Compliance


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