Bates Research | 11-01-22
State Securities Regulators Report on 2021 Enforcement Trends: Digital Assets Investigations, Increase in Promissory Note Enforcement, Concerns About Metaverse Fraud
NASAA, the North American Securities Administrators Association, published their 2022 Enforcement Report detailing data collected from 48 jurisdictions in 2021. This annual publication serves several purposes. Primarily, it is an attempt to aggregate the efforts undertaken by state regulators to protect the public from fraud. NASAA reports that in 2021, its members collectively investigated 7,029 cases (new and ongoing), engaged in 196 criminal complaints, filed 80 civil cases, and handled 1,284 administrative actions.
A second purpose of the report is to highlight emerging trends in specific types of cases. As Joseph Borg (NASAA 2021-2022 Enforcement Section Chair, pictured) states in his introduction, the report flags concerns about complex theft and misapplication, real estate and energy scams, cryptocurrency, non-fungible tokens, and metaverse schemes. Attention to these developments serves to reinforce the message that NASAA members are alert to increasingly sophisticated efforts by bad actors to take advantage of new technology. Third, the report repeatedly reminds their audience that NASAA members are on the front lines in fighting efforts to defraud investors and does so aggressively even as it navigates socio-economic challenges (like the pandemic).
The focus of the report—as in years past—is on aggregated metrics on investigations and enforcement actions. Here are the highlights.
State Licensing and Compliance
NASAA focused on metrics concerning licensure, including application denials, conditional approvals, suspensions, revocations, and barring professionals from conducting business in the state. As a tool used by securities regulators to “prevent bad actors from entering the industry” and to control those engaging in misconduct, NASAA reports that in 2021, 232 applicants were denied licenses, 278 applicants received conditional approvals, 26 professionals had their licenses suspended, 50 had licenses revoked and 61 individuals were barred from doing business in their respective states. These numbers all represented significant increases from the prior year. The report added that some 4,880 individuals withdrew their applications for licenses, many as a result of being presented with evidence from investigations or to avoid an enforcement action. This, too, represented an increase year-over-year and suggests a kind of deterrence that the regulators have created based on their effective licensing “gatekeeping” efforts.
Compliance cases involving licensed broker-dealers (678 investigations and 140 enforcement actions) and licensed investment advisers (478 investigations and 267 enforcement actions) encompassed the full range of oversight including on supervision, suitability, unauthorized and excessive trading, cybersecurity, and books and records.
State Investigations and Enforcement on Products and Schemes
NASAA reported that the top products and schemes subject to state investigation and enforcement in 2021 concerned digital assets, internet and social media, promissory notes, real estate, stocks and equities, and Ponzi schemes.
The regulators said investigations related to suspect securities linked to digital assets increased by 70% year over year. They stated that “the importance and sheer volume of the work cannot be understated.” NASAA reported that state regulators opened 215 investigations of illegal or fraudulent securities offerings related to digital assets and initiated 89 enforcement actions for “misconduct involving products incorporating digital assets.” NASAA said that scams tied to cryptocurrencies and digital assets are the top threat to investors in 2022.
NASAA also reaffirmed the significant trend of bad actors’ increasing use of the internet and social media to market harmful products. The regulators said they opened 127 investigations of suspect securities offerings marketed through the internet and social media and 106 enforcement actions against promoters that use the internet and social media to market their scams.
On enforcement actions related to promissory notes, the report stated that these cases reflect attempts to take advantage of investors seeking safer investments as promissory notes purport to provide stability in a volatile marketplace. The state regulators said that “there were more enforcement actions involving promissory notes than any other products – and it was not even close.” Notably, the regulators warned that schemes incorporating promissory notes represented “a top threat to retail investors for 2023.”
As to concerns about the metaverse, cryptocurrency and non-fungible tokens, NASAA’s report was more future-oriented than a presentation of 2021 data. The report highlights the concern that “bad actors may be able to use the new technology to more effectively conceal their identities, launder money, market and sell illegal goods and impersonate trustworthy parties.” The report states that “fraudsters are now leveraging widespread interest in the metaverse to promote illegal securities offerings and deceive retail investors.”
Elder Financial Exploitation
Referring to the adoption of the NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation (some form of which is law in 33 jurisdictions), NASAA said that 1428 reports were received by financial professionals, of which 356 investigations were opened and 54 enforcement cases were initiated. These were marked increases year over year attesting to the success of the Model Act. On suspected senior financial fraud, NASAA members reported fielding 1,320 tips and complaints (beyond those from financial professionals), opening 605 investigations and filing 304 enforcement actions. These ranged “from traditional sales of unregistered securities to an increasing number of illegal promotions tied to precious metals, frauds perpetrated through social media and the internet, romance scams and other schemes designed to exploit older investors.”
The bottom-line aggregate numbers on state investigations and enforcement actions leave an impression. NASAA’s annual enforcement report positions itself as one moment in a continuum (past, present, and future) of state efforts to protect state constituents. However, the report best serves as a reminder to firms of the reach of state regulators into every aspect of their license to do business and their relationship with clients. The warnings on current and future threats from the metaverse and digital assets tied to securities are less of a snapshot reflecting 2021 data and more an assertion of state regulator jurisdiction over new products, new markets and new marketplaces. The aggregate numbers—$312,097,734 in restitution and $145,567,334 in fines and penalties—are too big to ignore. By publishing this data, NASAA’s message couldn’t be clearer.
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