Enforcement Case Studies
Learn from anonymized case studies illustrating common state enforcement scenarios. These educational examples help you understand what regulators look for and how to avoid similar outcomes.
These case studies are anonymized and illustrative, created for educational purposes. They do not represent specific enforcement actions.
Misleading Performance Advertising
Advertising ViolationsScenario
A state-registered RIA with 45 clients published marketing materials on their website and social media showing backtested performance results without required disclosures. The materials implied guaranteed returns and cherry-picked favorable time periods.
Violation
Violation of the state advertising rule and NASAA model marketing rule. Misleading performance presentation, missing disclaimers for hypothetical results, and failure to present net-of-fees performance alongside gross figures.
Regulatory Response
The state issued a consent order requiring removal of all non-compliant materials, implementation of an advertising review process, payment of a $25,000 fine, and retention of an independent compliance consultant for 12 months.
Lessons Learned
- •All performance advertising must show net-of-fees alongside gross returns
- •Backtested and hypothetical performance requires prominent disclaimers
- •Social media posts are advertising and subject to the same rules
- •A documented pre-publication review process is essential
Inadvertent Custody Failure
Custody FailuresScenario
An RIA principal served as trustee for three client trusts, creating a custody situation the firm failed to recognize. The firm did not arrange for surprise examinations, did not disclose the custody on Form ADV, and did not ensure clients received custodian statements.
Violation
Multiple violations of the state custody rule: acting as trustee without recognizing custody obligations, failure to undergo surprise examination, incomplete Form ADV disclosures.
Regulatory Response
The state required the advisor to resign as trustee, undergo two consecutive surprise examinations, amend Form ADV, implement custody identification procedures, and pay a $15,000 fine.
Lessons Learned
- •Serving as trustee, having signatory authority, or holding client credentials all create custody
- •Annual custody assessments should identify all potential custody situations
- •Form ADV must accurately reflect all custody arrangements
- •Surprise examinations must be completed annually when custody exists
Systematic Record-Keeping Failures
Record-Keeping DeficienciesScenario
During a routine exam, regulators discovered that a 20-person RIA had no email archiving system, missing client files for 30% of accounts, no documentation of annual compliance reviews, and incomplete trade records.
Violation
Failure to create and maintain required books and records under the state books and records rule. Missing client correspondence, incomplete trade documentation, and no evidence of compliance program oversight.
Regulatory Response
The firm was ordered to implement an electronic document management system, reconstruct missing client files, hire a dedicated compliance officer, conduct a comprehensive compliance audit, and pay a $35,000 fine.
Lessons Learned
- •Electronic communication archiving must be implemented from day one
- •Every client account must have a complete documentation file
- •Annual compliance reviews must be documented thoroughly
- •Adequate record-keeping is fundamental to every other compliance obligation
Fiduciary Breach Through Conflicts
Fiduciary BreachesScenario
An advisor recommended proprietary products and higher-cost share classes to clients without disclosing the additional compensation received. The advisor also failed to disclose revenue-sharing arrangements with product sponsors.
Violation
Breach of fiduciary duty through undisclosed conflicts of interest, failure to provide best execution, and inadequate disclosure of compensation arrangements in Form ADV Part 2A.
Regulatory Response
The state required full client restitution of excess fees ($180,000), revision of all disclosure documents, implementation of a conflicts of interest policy, disgorgement of undisclosed compensation, and payment of a $50,000 fine.
Lessons Learned
- •All compensation arrangements must be fully disclosed in Form ADV
- •Fiduciary duty requires recommending the lowest-cost option when suitable alternatives exist
- •Revenue-sharing and proprietary product preferences must be disclosed
- •Regular conflicts of interest reviews should be part of the compliance program
Unregistered Advisory Activities
Registration ViolationsScenario
A financial planner began providing investment advisory services in three additional states without filing state registrations, relying on an incorrect interpretation of the de minimis exemption. The advisor had more than five clients in each state.
Violation
Conducting investment advisory business in states without proper registration, exceeding de minimis client thresholds, and failing to file required notice filings.
Regulatory Response
The advisor was required to cease advisory activities in the unregistered states, file registrations retroactively, pay registration fees with penalties for late filing ($12,000 total), and implement a multi-state registration compliance procedure.
Lessons Learned
- •De minimis exemptions have strict client count limits (typically 5 clients per 12-month period)
- •Multi-state operations require careful registration tracking
- •Registration must be in place before soliciting or advising clients in a state
- •A registration compliance calendar prevents costly oversights
Prevent enforcement issues proactively
Compliance Approved identifies risks before they become violations.