THE ENFORCERS

When the big Wall Street firms agreed to pay $1.4 billion to end government investigations of their research analysts, Eliot Spitzer, the New York State Attorney General, and the SEC got all the credit. But there was another place at the negotiating table for a group that is certainly unknown to retail investors and even obscure to most registered reps: NASAA. No, not the federal space exploration

When the big Wall Street firms agreed to pay $1.4 billion to end government investigations of their research analysts, Eliot Spitzer, the New York State Attorney General, and the SEC got all the credit.

But there was another place at the negotiating table for a group that is certainly unknown to retail investors and even obscure to most registered reps: NASAA. No, not the federal space exploration agency, but NASAA, the North American Securities Administration Association. The 83-year-old organization flies under the radar of the media, but the regulatory powers of its members are important in rooting out unscrupulous reps, and, along with the SEC, are vital in protecting retail investors. Its members — state and regional securities regulators — are the securities industry's beat cops, if you will, policing their jurisdictions actively but without much fanfare or attention. In fact, NASAA's role in the global settlement was such that big Wall Street firms wanted the organization and its members booted from the bargaining table.

“We're advocating for the public on the local level,” says NASAA president Christine Bruenn.

Every registered rep faces a NASAA member at least once in his life: When he takes the Series 63 — the state securities license. NASAA is made up of 66 state, provincial and territorial securities administrators in the 50 states, the District of Columbia, Puerto Rico, Canada and Mexico. In the U.S., NASAA is the association of the 50 state securities regulators responsible for efficient capital formation and grass roots investor protection.

While Spitzer attracted the klieg lights, NASAA created a task force, comprised of member organizations in 40 states, to coordinate the investigation and leverage resources. In fact, state regulators from Massachusetts and Virginia investigated and helped build the case against Credit Suisse First Boston. Utah state regulators tackled Goldman Sachs. California and D.C. looked into Deutsche Bank. New Jersey, Delaware and Maine took on Bear Stearns.

During the “global settlement” negotiations, Bruenn kept the involved parties apprised of what was going on with different groups and helped circulate each team's findings within the group. She also served as the state's liaison with the NASD, NYSE, SEC and the New York State attorney general. “I tried to be the common denominator — the one person who knew what was going on in each of the investigations, serving mostly as a communicator,” says Bruenn.

NASAA's input was well received. “NASAA served a critical role as go-between, helping states stay in touch and keep them updated about what was going on with each other's investigations and, later, how the negotiations were proceeding,” says Mark Sendrow, Arizona's director of securities, whose office worked with Connecticut and Oklahoma on the UBS PaineWebber probe.

A few months into the concerted probe, the securities industry, led by Morgan Stanley, struck back through Congress, trying to eliminate the states' role as regulators by attaching an amendment to an early version of the Sarbanes-Oxley Act. The net effect, according to then-NASAA president Joe Borg, would be to shut down the multi-state task force. NASAA successfully lobbied Congress to shoot down the amendment.

This is not the first high-profile investigation NASAA has coordinated, says Borg. “On the enforcement side, we've had multi-state projects that go back to boiler-room task forces, formed to handle cases like Biltmore Securities in the early 1990s.” In that case company officers sold their warrants in a restaurant company while urging investors to buy them. Similarly, NASAA helped orchestrate state probes into day trading, micro-cap firms and Prudential's limited partnership case.

But high-profile cases generally are not NASAA's meat and drink. NASAA usually toils behind the curtain, attending to routine issues like helping states qualify, register and license brokers and educating investors. With a Washington office and a full-time staff of just 16, most of the work is done in member committees. The association convenes project groups comprised of state regulators to work on key areas of interest. For example, its broker/dealer group has seven separate committees working on issues ranging from continuing education to financial services modernization. The corporate finance and administrative group works on issues that help small businesses and franchises on the local level gain access to capital. And the enforcement group has committees devoted to unregistered products and to attorney/investigator training.

NASAA also helps oversee processes and procedures. It recently updated the Series 63 exam and developed a parallel Series 65 exam to regulate fee-only investment advisors. And NASAA jointly owns the online databases with the NASD where brokers and investment advisors must register to be licensed. “Reps need to know there is an umbrella organization that coordinates the efforts of licensing, education and enforcement,” says former president Borg. “This way, they can have one-stop shopping when it comes to licensing.”

NASAA also helps educate state securities office staff through national training workshops on everything from training attorneys to investigate securities cases to updating staffs on how to best administer exams. In addition, it keeps securities commissioners up to date on changes in legislation. For instance, it held a meeting recently in Charleston, S.C., to update regulators from each state on changes in the Uniform Securities Act.

Lastly, NASAA board members serve as a voice of the state regulators in lobbying efforts. “We do use the Washington office as a means of communicating to Congress what we do and what national regulation will effect small investors in their state,” says Bruenn. “Members of Congress are generally interested in our perspectives because they hear regularly from corporations, and we like to think that we're the voice of the people.”

And although some recent cases have gotten NASAA more media attention than usual, Bruenn claims: “We're just doing the same things we've always done.”

Top 10 Investment Scams According to State Securities Regulators

  1. Unlicensed individuals, such as independent insurance agents, selling securities. Scam artists use high commissions to entice independent insurance agents into selling investments, such as bogus limited partnerships or promissory notes, offering high returns with little or no risk.

  2. Unscrupulous stockbrokers. Based on conflicting account statements, North Dakota regulators discovered that some H.D. Vest Investment Securities brokers issued phony account statements to cover up losses from hundreds of unauthorized trades.

  3. Analyst research conflicts. Regulators continue to probe a dozen firms to determine whether analysts issued “buy” recommendations on loser stocks to win investment-banking business.

  4. Promissory notes. These are short-term debt instruments often sold by independent insurance agents and issued by little known or non-existent companies promising high returns — upwards of 15 percent monthly — with little or no risk. In Georgia amounts scammed reached $150 million.

  5. Prime bank schemes. Scammers promise investors triple-digit returns through access to the investment portfolios of the world's elite banks. These scammers often target conspiracy theorists, promising access to the “secret” investments of the Rothschilds or Saudi royalty.

  6. Viatical settlements. Originally intended to help terminally ill patients pay their bills, scammers have sold viatical settlements to healthy people.

  7. Affinity fraud. Scammers use victims' religious or ethnic identity to gain trust and steal their life savings through church “gifting” programs and foreign exchange scams targeted at Asian Americans, for example.

  8. Charitable gift annuities. These are transfers of cash or property to a charitable organization that are worth more than the annuity, where the difference constitutes a charitable donation. Many are legitimate, but crooks have used false charities to steal gifts.

  9. Oil and gas schemes. These scams follow the headlines, rising in frequency with predictions of oil shortages and spikes in natural gas prices. In Arkansas, two companies marketed as a “can't lose” opportunity a natural gas well that hadn't produced in years.

  10. Equipment leasing. While most such deals are legitimate, thousands of investors have been scammed by individuals selling interests in pay phones, ATMs or Internet kiosks.

Source: NASAA

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