State regulators play a pivotal role in maintaining the integrity of the securities industry, particularly when it comes to protecting retail investors. While federal agencies like the SEC often garner more attention, state securities regulators serve as critical front-line enforcers of compliance and ethical standards within their jurisdictions. Through targeted enforcement actions and oversight, state regulators address misconduct that can often slip through the cracks at the national level, ensuring that investment advisors and firms adhere to both state and federal regulations.

In its latest report, the North American Securities Administrators Association (NASAA) identified breach of fiduciary duty and failure to register as recurring themes among enforcement actions initiated by state regulators in 2023. The data, drawn from state-level actions, provides critical insights into the types of misconduct that continue to attract regulatory scrutiny within the investment advisory space.

According to the report, the number of state-registered investment advisors decreased slightly to 16,897, reflecting a net reduction of 166 firms from the previous year. This reduction signals not only a shift in the market but also the ongoing regulatory challenges that firms face in maintaining compliance with evolving standards.

Top Causes of Enforcement Actions

Among the most frequently cited violations leading to enforcement actions—whether litigated or settled prior to a hearing—were:

• Failure to register as an investment adviser

• Failure to register as an investment adviser representative

• Fraud

• Inadequate compliance policies and procedures

• Breach of fiduciary duty and failure to disclose conflicts of interest

• Improper fees

• Violations of existing policies and procedures

• Suitability violations

• Failures related to equities, ETFs, private placements, and non-disclosure of disciplinary actions

Client Focus and Compensation Models

The NASAA survey also highlighted trends in client demographics and compensation structures among state-registered firms. A majority of these firms (74%) serve retail investors, with 18.9% focusing on high-net-worth clients. Notably, 84.3% of firms operate on a fee model that charges a percentage of assets under management, while a significant 94.7% of firms are registered as investment adviser representatives.

This report serves as a reminder of the heightened vigilance regulators maintain regarding core compliance obligations, and the importance for firms to address potential conflicts of interest, ensure accurate registration, and maintain robust compliance frameworks to mitigate enforcement risks.

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