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player ready...(Reuters) – New supervision rules led U.S. state securities regulators to sharply increase the number of enforcement actions they took against investment adviser firms in 2011, according to a recent survey.
The regulators took nearly 400 criminal, administrative and civil actions against investment advisers in 2011, up from 208 a year earlier, according to a survey of 48 state regulators released on Tuesday by the North American Securities Administrators Association, or NASAA, an advocacy group for state and provincial securities regulators.
The increased actions were not due to a crime spree, instead they came as the 2010 Dodd-Frank Act transferred the oversight of over 2,000 mid-sized investment advisers to state regulators from the Securities and Exchange Commission. The change was made in part because the SEC lacked the resources to examine smaller advisers.
Many of these firms had not been examined regularly by the SEC, and some had never been examined at all, said Judith Shaw, chair of enforcement for NASAA.
Overall, the number of investigations by state regulators, who also supervise broker dealers, fell to 6,100 in 2011 from 6,356 a year earlier. The number of enforcement actions fell to 2,600 in 2011 from 3,475.
Shaw, who is also the securities administrator for the state of Maine, said 2010 had been a particularly busy year because of actions related to the economic crisis.
As in 2010, most of the actions last year involved unlicensed salespeople selling unregistered securities. The most common unregistered products involved in fraud were private placements, also known as Reg D offerings.
Private placements are securities that can provide a way for small companies to raise capital, and they do not have to be registered with regulators. They are supposed to be sold only to investors who meet certain income and net worth standards.
The other most common scheme involved real estate fraud. For instance, in Utah a man raised $4 million after telling investors he would guarantee them a minimum return of 18 percent for a project to purchase and refurbish real estate properties. Instead, the funds were directed to a single, highly leveraged development that went bust, NASAA said in its survey.
Shaw said private placements and real estate projects are go-to scams for swindlers because they are easier to sell to investors than complicated securities.
“They tend to be easy pitches to make to individuals,” she said.
The survey found regulators ordered a total $2.2 billion be returned to investors in 2011, a sharp drop from the $14.1 billion returned a year earlier. The spike in 2010 was largely due to settlements between state regulators and brokerage firms that required the repurchase of auction rate securities from customers.
Auction rate securities were sold as highly liquid short-term instruments similar to money-market funds, but with slightly higher returns. When the $330 billion auction-rate market failed during the economic crisis, as large investment banks that ran the auctions ran into cash crunches, thousands of investors were left with securities that could not be sold.
(Reporting By Jennifer Hoyt Cummings; Twitter @jenhoytcummings; Additional reporting by Suzanne Barlyn; Editing by Tim Dobbyn)