State regulatory enforcement occurred at a higher level in 2020 than it had in most recent years even as many regulators worked from home due to the coronavirus pandemic, according to a report released Wednesday.
State securities regulators opened 5,501 new probes last year and conducted 2,202 overall enforcement actions — including 206 criminal, 116 civil and 1,788 administrative — the North American Securities Administrators Association revealed in its 2021 Enforcement Report. The total number of investigations and enforcement actions was higher than in any year from 2016 through 2018. They were eclipsed by the 2019 totals.
State regulators provided $306 million in restitution to harmed investors in 2020 and levied $42 million in fines. Both of those numbers were lower than those recorded in recent years.
The NASAA report, which is based on 2020 data, indicates increasing state-level enforcement activity involving digital assets, commodities and precious metals, social media and self-directed individual retirement accounts.
“State securities regulators are at the forefront in the ongoing fight against financial exploitation and investment fraud,” NASAA president and Maryland Securities Commissioner Melanie Senter Lubin said in a statement. “This report shows that state enforcement activity remained strong in 2020 despite the challenges of the COVID-19 pandemic.”
Like most investors, state regulators worked remotely during the outbreak. But a lot of investigative work can be done electronically, which allowed them to pursue many cases.
“I think a lot of it has to do with the technology and the fact that the state securities regulator resources continued and the work continued even during the pandemic,” Joe Borg, director of the Alabama Securities Commission and NASAA enforcement co-chair, told reporters on a conference call. “I do think we saw quite a bit of slow down on the criminal side, but, then again, remember that there’s a time lag between opening up an investigation and then moving forward on the cases.”
The state regulators launched investigations because they were trying to prevent scams related to the pandemic, such as fraudsters pedaling bogus investments related to purported cures.
“We were trying to be proactive rather than reactive to a greater extent, and that’s exactly, I think, one of the reasons you’ll see higher numbers [of investigations] but perhaps less restitution or recovery,” Borg said. “When you’re proactive, you try to prevent it from happening in the first place.”
PROBLEM AREA: SELF-DIRECTED IRAs
One of the areas where state regulators are seeing increasing investor harm is in self-director retirement accounts. The NASAA report suggested the problem centers on alternative investments, such as real estate, private company stock, promissory notes, oil and gas offerings and cryptocurrencies that aren’t allowed in traditional IRAs.
The NASAA report said the number of enforcement actions involving self-directed retirement accounts increased to 53 in 2020 from 24 in 2019.
“These schemes allow the scammers to access an investor’s 401(k) and IRA savings after they have been rolled over into the SDIRA, and they can be devastating to an investor’s retirement,” the NASAA report states. “The problem is amplified by the fact that custodians generally do not evaluate the quality of any investment in the SDIRA or its promoters.”
Fraudsters prey upon investors’ lack of knowledge about the lower level of protection in self-directed accounts compared to traditional IRAs, Borg said.
“That became the new trust vehicle for con artists to convince folks ‘you’re not sending the money to me, you have control over it,’” Borg said. “There is an IRA custodian. After all, they call do call them trust companies. Con artists … use that as their new go-to trust factor.”
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Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.