I truly enjoyed attending the NASAA Presidents Reception on Monday. It enjoyed reconnecting with Marni Gibson of Kentucky, who recently took the helm as NASAA President, along with dozens of other the state regulators I know and respect from the decade I spent serving as NASAA’s Director of Policy and Government Affairs prior to launching LXR Group. It was also a delight to catch up with friends and colleagues from organizations like the Investment Adviser Association, FINRA, and the CFA Institute, who share NASAA’s commitment to investor protection and fair markets, and congratulate my friend Andrew Hartnett on his move to the Financial Services Institute – it was his first night on the job and he did great.
But what struck me just as much were the absences. I didn’t see many familiar faces from the Securities and Exchange Commissionor from Congressional committees. Their absence was notable, not because they lack interest, but because the shutdown kept them away at a moment when dialogue is badly needed. The contrast was stark: while federal partners were sidelined, state regulators were fully engaged, demonstrating once again who is carrying the mantle of investor protection when Washington goes dark.
Although many federal partners couldn’t be in the room, the substance of the conversation is too important to overlook what they missed. Investment fraud is surging, and it is the states that are holding the line for investors State regulators are still conducting examinations, still blocking bad actors, still securing restitution — while Washington debates whether to take those very tools away. To sideline the states now would not only undercut investor protection, it would abandon the federal–state partnership that has safeguarded markets for more than a century
The conversations collectively reinforced how deeply the states’ work is respected across the financial regulatory community, and for the benefit of those federal and Congressional partners that missed them, this post summarizes some of the key takeaways.
1. State regulators face an existential threat, just as fraud is rising and federal oversight is floundering.
The Senate’s draft Responsible Financial Innovation Act (the RFIA) would drastically curtail the main tools that have defined state regulators’ effectiveness for more than a century — registration, licensing, gatekeeping, supervisory exams, and broad and flexible antifraud theories. Without them, the cops on the beat who have protected ordinary investors through every major market crisis would be sidelined at the worst possible moment.
As twenty-eight academic leaders in securities and financial regulation explained in a letter to Congress early this month, “The provisions currently in RFIA would weaken well-settled principles of securities regulation, making it more difficult for regulators to stop online scams and other investment frauds…They would remove important guardrails designed to screen out bad actors from the securities marketplace and leave investors more vulnerable.”
The record from just the past year proves why this matters. According to NASAA’s 2025 Enforcement Report, based on 2024 data, state regulators conducted more than 8,800 investigations and brought over 1,100 enforcement actions. Their efforts secured nearly $190 million in restitution for investors, more than $66 million in fines, and over 3,400 months of prison sentences against fraudsters.
From Ponzi schemes to pig-butchering and crypto scams, state examiners are usually the first to detect misconduct. They’re on the ground in communities, responding to victims and spotting patterns before they hit national headlines.
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State enforcement remains focused on protecting ordinary retail investors.
State regulators consistently bring more fraud cases than the SEC, especially against the small and mid-sized scams that devastate retirees and working families. They aren’t billion-dollar headlines — they are the everyday cases that determine whether investors can recover savings or lose them forever.
For example, when brokerage firms aggressively pushed risky non-traded REITs on seniors and retirees in the 2010s, it was state investigations and enforcement actions that forced restitution and changes in firm practices.
Similarly, states led the way in the auction-rate securities crisis of 2008–2009. In this case, the products were long-term bonds and preferred shares (often municipal bonds, student-loan backed securities, or closed-end fund preferred shares) that were marketed as cash-equivalents because their rates reset at periodic auctions.
These examples underscore the larger point: state regulators are the ones who consistently step in to protect ordinary “mom and pop” investors when products are mis-sold or markets fail. Their enforcement activity directly helps ensure that retirees, families, and small businesses and institutions are not overlooked or left behind when federal oversight is focused elsewhere – or sidelined because of federal dysfunction and shutdowns.
Unfortunately, under the RFIA as presently drafted, state regulators would be stripped of the authority to pursue fraudsters pushing pig butchering and Ponzi schemes, promissory note frauds, real estate swindles, and fraudulent oil and gas offerings. Without their enforcement powers, state regulators would be unable to investigate or take action against these bad actors, allowing loopholes and ambiguities to be exploited and resulting in even greater harm to investors.
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Blue-sky laws remain indispensable as a gatekeeping tool – they play a major role in keeping the industry clean and safe for investors.
For over 100 years, state “blue-sky” laws have kept speculative and fraudulent investments out of the hands of ordinary citizens and remain the first line of defense against promoters selling bad paper. A major reason – sometimes overlooked or not fully appreciated by federal policymakers – is how significant these laws are as a gatekeeping function.
Every year, state regulators deny, condition, or revoke hundreds of registrations for securities offerings, broker-dealers, investment advisers, and agents. Those decisions stop bad actors before they ever reach investors’ wallets.
This gatekeeping role is critical to preventing “cockroaching” — the all-too-common practice where a barred or disciplined individual tries to resurface in another jurisdiction or under a different label. By reviewing applications closely and coordinating across states, regulators can keep serial fraudsters from reentering the market and preying on new victims.
That gatekeeping function extends beyond products to the people and firms who sell them. By licensing, examining, and supervising brokers and advisers, states often stop misconduct before it starts — authority that the RFIA would strip away in favor of less responsive federal oversight.
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Federal–state coordination only works if states keep their tools.
In thinking about the role of state and federal enforcement authorities, it is instructive to look back at the regulatory responses to the major financial scandals over the past decade. From the investigation into the role of investment banks in the Enron fraud, to exposing securities analyst conflicts, “market timing” in mutual funds, and to uncovering problems in the auction rate securities market, state securities regulators have consistently been critical partners to federal regulators, and sometimes in the lead.
Whether acting independently or collaboratively, such as through the NASAA enforcement framework or in conjunction with federal regulatory partners, state securities agencies have a long history of pursuing enforcement actions that affect not only the residents of our individual states, but also the citizens of our nation as a whole.
State securities agencies are less bureaucratic and usually nimbler than their federal counterparts. Upon identifying a problem, states can move quickly to halt ongoing investment frauds using a range of civil and administrative remedies.
As Acting SEC Chair Mark Uyeda observed earlier this year, federal and state regulators “share goals and a common purpose to protect investors and strengthen our capital markets.” That common purpose only works if both sides retain the tools to act.
Former SEC Commissioner Luis Aguilar put it even more plainly: the SEC–NASAA partnership has always been “crucial to achieving our common goal of protecting investors, maintaining market integrity, and facilitating capital formation.”
However, the federal–state system works only when both sides have a full set of tools. If Congress strips the states of their core authorities, that balance collapses.
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State agility is essential in responding to new technologies.
State regulators often spot new threats first — from pig-butchering to NFT fraud to AI-driven schemes — and act before federal agencies can. Their proximity to local markets and investors gives them the ability to identify new patterns of misconduct quickly, intervene early, and prevent losses before they spread.
For example, states truly led the way in confronting crypto fraud. In 2018, NASAA launched Operation CryptoSweep, a coordinated effort by more than 40 state and provincial regulators that identified and investigated hundreds of fraudulent crypto investment products and offerings. That initiative became one of the largest coordinated enforcement actions against crypto fraud in U.S. history, and it demonstrated how quickly and effectively the states can mobilize to protect investors from emerging risks.
That same responsiveness is now proving critical in the face of AI-driven frauds, where scammers use deepfakes, voice-cloning, and automated scripts to impersonate advisers and lure victims. States have already begun issuing investor alerts and opening cases in this space, often months before federal regulators act.
In addition to their agility in responding to new technologies, state regulators have developed innovative approaches to disrupt online fraud. For example, states have actively worked with domain administrators to take down fraudulent websites, cutting off scammers’ access to victims. In some cases, state authorities have even managed to freeze crypto assets linked to fraudulent schemes, preventing bad actors from accessing illicit funds, though returning those assets to investors remains a complex challenge.
This agility is not accidental — it comes from their closeness to investors and their ability to act without waiting for Washington to build consensus. Weakening that capacity would leave investors exposed just as the next generation of fraud is accelerating.
If the RFIA were enacted as currently drafted, and these transactions were no longer considered securities transactions, state regulators would lose the authority to investigate and intervene in these cases. This would severely limit their ability to protect investors from emerging threats in the digital marketplace.
Conclusion
The choice before Congress is stark: strengthen the cops on the beat or sideline them. Weakening state authority now would hand fraudsters an opening and erode the trust of millions of investors who rely on these protections.
The crypto lobby is pressing hard for preemption, but Congress must decide whether to cave to industry pressure or draw the line at investor protection. State authority — especially examinations and enforcement — is that line. Preserving it means keeping regulators closest to investors empowered to block bad actors, recover losses, and adapt quickly to new threats.
Congress should build on — not weaken — the federal–state partnership that has safeguarded markets for over a century. Reject the RFIA’s preemption of state authority, preserve state registration and licensing powers, and keep regulators at every level equipped to fight fraud and protect investors in the decades ahead.
