State securities regulators saw a busy 2021, and 2022 looks to continue in much the same fashion. Some of the more active topics for regulators have included protecting senior investors, stopping fraudulent investment schemes targeting individual investors, and battling the ever-present threat of Ponzi schemes. Another big headline for regulators was cryptocurrency companies and the correct approach of those entities from a regulatory framework. Bradley attorney Jeffrey Blackwood recently sat down with Director of the Mississippi Securities Division Mike Huggs to discuss these and other topics.
Q: Looking back on 2021, can you tell me what areas of the securities industry the division spent the most time on?
A: The areas we deal with are registrations of products, licensing of persons, examinations, investigations, and education. We spend about an equal amount of time on examinations and investigations in any given month. However, as of late, investigations have taken a bit more of our time. This is followed by registrations.
Q: Do you anticipate those trends to continue in 2022?
A: Yes. Investigations will continue to take a large part of our time. As baby boomers, born after WWII 1946-1964, are retiring or nearing retirement, they present a target-rich environment for investment sales pitches touting large profits or safety and security for their nest egg. Unscrupulous firms and salespersons capitalize on seniors’ fears of running out of money during retirement or losing retirement investments due to economic conditions, the pandemic, or government intervention. The investments promoted are typically either too risky, too costly, or tie up the investor’s funds for a long time. As long as there are those who instill fear to make sales, this trend will continue. We will continue to spend resources on examinations to both help prevent and detect violations. Helping our local agents, representatives, and firms stay in compliance and functioning with the client’s best interests first will remain a priority.
Q: What does the division see as emerging areas of concern from the view of the regulator in 2022?
A: It is not really emerging as much as it is growing: fraud. By far, most of our complaints are regarding fraud (i.e., foreign exchange frauds, financial exploitation by fraud and private offerings). The use of the internet to perpetuate those frauds has been increasing dramatically, particularly over the past two years, as all generations have turned to the internet as a means to stay connected. With the growing presence of online trading platforms, which allow individuals to trade everything from cryptocurrency and foreign currencies to private offerings and regular stocks, and the growing use of social media, the stage seems set for investors to fall prey to fraudulent schemes.
Q: Cryptocurrency continues to be one of the leading topics both on the national and state level. Do you anticipate cryptocurrency issues to be an area of focus for the division, along with the more traditional areas of regulatory focus?
A: I don’t think that “area of focus” is the right phrasing for it. Cryptocurrency use as both currency and a security/investment is becoming more mainstream, and as it becomes more of a household word, it seems logical to assume more investors may seek to purchase or trade cryptocurrencies as an investment. The more investor activity in the crypto space, the more likelihood of fraud. So, I would not say “area of focus” but maybe the subject of more complaints and investigations.
Q: How does the division balance the fact that cryptocurrency represents a large area of concern for potential investor fraud, while at the same time it is becoming a part of everyday life?
A: There are two different application scenarios of cryptocurrency we see: First, using cryptocurrency to actually make purchases or make monetary transfers, and then second, purchasing cryptocurrencies as an investment hoping that a particular cryptocurrency coin or token will increase in value in the near future. While the first scenario may or may not be edging into part of everyday life, the second scenario certainly concerns regulators.
Q: Do you have any tips for broker-dealers and investment advisors doing business in Mississippi?
A: Yes. Perform and document extensive due diligence on any of these obscure products before recommending them to a customer. Assess and document the risk tolerance and suitability of the customer prior to recommending such investments. Don’t recommend products that you don’t completely understand yourself.