There is an old saying: “the more things change, the more they stay the same.”  It seems every few years (usually, the result of a political shift) we see the states become more involved in securities enforcement.  Our current time is now subject to this cyclical experience.

The SEC and the North American Securities Administrators Association (“NASAA”), the state securities regulators, have signed a memorandum of understanding (“MOU”) to share information so as to assist each other in monitoring compliance over, among other things, the new crowdfunding rules and fraud.  The SEC and NASAA’s individual members — the states– will use this information in investigations, examinations, and any proceeding or civil action.  The SEC and NASAA believe this new MOU continues their long-standing partnership over enforcement and compliance issues.

However, we should not be fooled by this MOU.  This is not a simple sharing of information, but, essentially, it will be a license for state securities regulators to obtain more information, resulting in more  aggressive and common state prosecutions.  Ironically, the federal securities laws were an attempt to unify and facilitate the capital raising process by having one set of rules and laws.  However, given the political vagaries of our system, these arrangements could and, most likely, will result in the balkanization of our securities markets and practices.



As recently reported in the Investment News, the North American Securities Administration Association (NASSA) reported on the results of state coordinated examinations. The relative good news was that there were 30% fewer deficiencies from 2013 to 2015.

These examinations revealed, however, five areas of particular concern for state based investment advisors. These issues are:money and calculator

  1. Not adequately documenting the suitability of investment recommendations being the biggest concern.
  2. Failing to adequately explain fees in contracts.
  3. Inconsistencies in the FORM ADV Parts 1 and 2.
  4. Charging fees not as outlined in the Form ADV.
  5. Improper client invoices for direct-fee reduction.

If you are a state-based advisor, you should be asking yourself if you have any of these deficiencies. If your conduct falls within any of these areas of deficiency, you should take action now to correct them, or face regulatory exposure in the future.

On January 1, 2013, California joined Maryland and Illinois in restricting securities employers’ access to their employees’ and job applicants’ social media accounts.  This new law was announced on Twitter, and provides that an employer cannot require or request an employee or applicant to:

  • disclose a user name or password for the purpose of accessing personal social media;
  • access personal social media in the presence of the employer; or
  • divulge any personal social media, except as provided in subdivision.

The law also prohibits discharging, disciplining, or retaliating against an employee or applicant by an employer who violates this law.  Employers may still terminate or sanction an employee or applicant if there is some other law that would allow such termination or sanction.  Further, such information may still be requested if it is relevant to an investigation or allegation of employee misconduct or violation of applicable laws and regulations.  However, the information may only be used for that investigation or a related proceeding.  Additionally, in what may be somewhat of a saving grace, the law does not apply to employer-issued electronic devices. 

California joins a growing number of states who are restricting securities employers from having access to their employees’ social media.  Time will tell if this legislation is wise or opens up a giant loophole for securities fraud.

The North American Securities Administrators Association is exceedingly active, coordinating many broker-dealer examinations by a variety of state regulators. 

NASAA has found that the greatest number of violations involved books and records, and supervision.  NASAA’s report recommended 10 best practices so that broker-dealers may develop appropriate compliance practices and procedures.  In particular, NASAA recommended developing compliance procedures in, among other things, suitability; supervision; branch office audits; exception reports; outside business activities; selling away; advertisements and sales literature; correspondence; customer complaints; and senior customers. 

Although following this advice is not a “get out of jail card,” it does provide broker-dealers with a road-map for developing appropriate procedures to appease state regulators.

The SEC’s Division of Trading and Markets released guidance on the JOBS Act’s elimination of restrictions on analyst communication and research reports concerning initial public offerings of emerging growth companies.

The real quandary that the guidance addressed was related to the Elliot Spitzer settlement between regulators and major investment banks announced in 2003.  This settlement required strict firewalls between research and underwriting activities at certain major banks.  The SEC Staff clearly indicated that the JOBS Act “does not change” the settlement, thus requiring said signatories to obtain court approval to alter the pact.  If these signatories sought to change the pact, the SEC would then consider such an application, and respond accordingly.  However, the  SEC’s view at this point is that it has no authority to change this settlement with a rule. 

Essentially, the SEC has said nothing has changed with the JOBS Act, and, if investment banks want to take advantage of the JOBS Act provisions, they better be prepared for a Court fight from the SEC.

Private equity companies have recently been hit with a barrage of regulatory subpoenas.

Responding to these subpoenas may cost the private equity firms to expend millions of dollars.  These entities should have D&O liability insurance.  Initially, the entity must make sure that responding to such a subpoena falls within the definition of a claim.  Some policies may not define claim so you may then have to hope that the court reviewing your matter accepts a definition that will encompass a response to the subpoena.

Essentially, be prepared before receiving the subpeona, call your insurance broker (and lawyer) today!

This blog entry about hedge fund insurance coverage almost sounds like a car insurance commercial.  Sadly, both are critical in today’s modern society.

Given the current regulatory environment, volatile market conditions, and the public perception of the industry, hedge funds face enormous risk in doing business.  Hedge funds should carry both D&O and E&O Liability Insurance to protect directors, officers, managers and the fund itself from liability.

The hedge fund should have coverage for governmental investigations.  Additionally, the hedge fund also needs coverage for when it or its affiliates are alleged to have committed fraud.  However, the hedge fund must be cautious in this particular area because insurance companies, generally, try to avoid such coverage and will construe just about anything as an admission of wrongdoing or responsibility.  Finally, the hedge fund has to ensure that its insurance coverage will pay for defense costs since said costs are usually the most expensive part of the process.

In short, hedge funds cannot just assume that insurance coverage will be there.  Periodic audits and check-ups are required before anything arises.  Like most insurance coverage, you never want to have to use it, but that is why it is there so make sure it will work.

State securities regulators are going after investment adviser firms with a vengeance, including, but not limited to, seeking prison time for those who violate the their securities laws.

A recent NASAA report indicated that investment adviser actions nearly doubled from the previous year.  In fact, these actions comprised approximately 15% of all state securities enforcement actions.  Criminal actions also rose along with administrative licensing proceedings and unregistered investment adviser actions.

This trend is assuredly going to continue and investment advisers must take precautions before they are looking down a criminal indictment.

With the east coast in the midst of Hurrican Sandy, I am sure we are all thinking about a nicer place right now.  Apparently, the Seventh Annual National Institute on Securities Fraud is November 15-16, 2012 in New Orleans. For more information and to register, call 800-285-2221 or log on to:

For those who believe that the Garden State’s greatest contribution to the securities industry is that Snooki of Jersey Shore fame does not practice in the field, think again.

In the past, we have blogged that the Dodd-Frank Act would require the shifting of numerous registered investment advisors from SEC oversight to state oversight.  The results are now in.  The New Jersey Bureau of Securities (a bureau within the New Jersey State Attorney General) has reported that it has seen an increase of 8% in registrations directly attribuatable from this shift of advisors into state registration.  The new registration applications are from over 100 advisor firms.

Such an influx has forced the New Jersey Bureau of Securities to dedicate more resources to review these new advisors.  In fact, four new employees were hired to handle this extra workload.  I wonder if Snooki needs a job????

In any event, RIA state registration for many is a by-product of the Dodd-Frank Act, and states, like New Jersey, will be on the front lines in the regulatory battles to be fought in the future.