Administrator Abilities

The Administrator has the ability to:

Investigate - At any time, the Administrator can conduct public or private investigations within or outside of a state, which the Administrator considers necessary or appropriate to determine whether a person has violated, is violating or
is about to violate a rule, or to aid in the enforcement of the USA. In conducting an investigation, the Administrator can at any time:

Require (or permit) a person to testify, file a statement or produce a record regarding facts or circumstances of a situation; or

"Publish a record concerning an action, proceeding or investigation."

In general, the Administrator has the ability to inspect records within (and outside of) their respective state. The Administrator can also require those being investigated to provide written statements -- under oath.

Issue subpoenas - The Administrator may at any time issue a subpoena for investigation-related information, if he/she has jurisdiction over a transaction or security in question.

Jurisdiction

NASAA's Study Guide for the Uniform Securities Agent State Law Exam (the Series 63) states that:

The scope of the act section is intended to prescribe the limits of a state's jurisdiction to regulate securities transactions and the activities of persons engaged in the securities business by defining what "in this state" means with regard to: offers to sell or buy securities; or acceptances of offers to buy or sell securities.

Generally, the Act applies to all offers to sell or buy and all acceptances of offers to buy or sell securities if they originate from, are directed to, or are accepted in a state. Any part of an offer which is "in this state" will subject the whole transaction to the Act. Thus, if the client receives a soliciting telephone call in this state, it will not matter that the client actually goes out of the state to make payment, sign a contract, or to receive a security [Section 414].

Jurisdiction as applied to publications or radio. An Administrator does not have jurisdiction if:

The publication is a bona fide newspaper or other print media, and;

More than two-thirds of the publication is circulated outside of the state it is published; or it is a TV or radio broadcast that is syndicated from outside the state.

In addition, an Administrator does not have jurisdiction over:

Any electronic communication originating from outside the state; or

Any electronic communication that comes from within the state, but is not intended for distribution within the state.

Jurisdiction as applied to investment advice and misrepresentation

The Administrator has jurisdiction if an individual attempts to defraud in the Administrator's state, whether or not the individual/entity in question is in the state or not.

Administrative Actions

The Administrator has the power to deny, revoke or suspend registrations or licenses at any time, if the Administrator feels he/she is acting in the public interest. Moreover, the Administrator has an OBLIGATION to not misuse his/her powers for personal gain.

In addition to the following items (initiated by the Administrator), a broker-dealer may withdraw its own registration at any time and is effective 30 days after an initial withdrawal application is filed (unless there are pending disciplinary proceedings).

Finally, if a broker-dealer withdraws its registration, and then (within one year) the Administrator finds wrongdoing, the Administrator may still commence disciplinary proceedings.

Denial

The Administrator may deny an application if:

It is incomplete, contains any misleading information or omits vital facts;

Within the last 10 years, the applicant was convicted of a securities-related misdemeanor or any felony whatsoever -- regardless of whether it was securities related or not;

Another Administrator already denied registration, or another suspension or revocation order is already in effect;

The Administrator finds that the applicant is not financially solvent, and/or in a state of bankruptcy. This is more frequently applied to firms than to individuals;

A court order exists barring the registrant from working in the securities industry;

Or the Administrator deems that the registrant is not qualified for the type of business he/she intends to pursue. However, an Administrator cannot suspend registration if the registrant can materially prove he/she is qualified.

Revocation

An Administrator may revoke registration at any time if any one of the above six items (listed under Denial) are found to be true. In addition, the Administrator may revoke the registration of an officer or partner of a firm without crippling the entire firm, although such could also be grounds for revoking the registration of the firm as a larger entity.

Registration may be revoked from an agent but not the broker-dealer, if the broker-dealer is found to have been competently supervising the agent - even though that broker-dealer was not able to prevent the agent from committing a fraudulent act. However, if the agent's fraudulent activity was the direct result of a broker-dealer's incompetent supervision, then the broker-dealer's registration is at risk as well.

Suspension

Suspension can occur for the same reasons as denial, although pending a hearing, registration may be reinstated. Hearings must be granted within 15 days of the written request of the party subject to the order.

Cancellation

Though not in the NCCUSA's outline of the Series 63 examination, an Administrator may CANCEL an agent's registration if the agent is found to be deceased or unable to perform his/her duties. In short, if for any reason the agent becomes mentally incompetent (legally), the Administrator may cancel registration. If an agent disappears and cannot be found after a reasonable search, the Administrator may cancel registration.

Cease and Desist

The Administrator may issue a cease and desist order, if it has determined that a particular action is in violation of the USA. Then, if the order is ignored, the Administrator may have a court intervene and issue an injunction against the
party in question.

Civil Liabilities

Civil liabilities arise when a violation of the USA has occurred and the person harmed wishes to sue in order to recover any losses incurred.

All securities professionals are liable for civil actions if the USA is violated. Purchasers of securities (where there is an infraction of the USA) can sue for recovery of losses.

There are several instances in which a client may sue:

A direct violation of the USA occurred, where a securities transaction ensued.

An agent, broker-dealer or investment adviser sold securities in violation of a direct rule of the Administrator.

Securities were sold by an unregistered person.

Misleading statements or omitted facts led to the sale of a security.

The securities sold were misrepresented - as either approved (as recommended) by the Administrator or another governing body; or misrepresented as being listed on an exchange (or to be listed), when, in fact, the information was false.

There was a violation of the state's sales literature requirements.

If a violation occurs, a purchaser can then sue for damages. There is a simple formula relating to recovery:

Purchasers can sue for:

Reasonable attorney fees and other costs
+ Interest
+ The purchase price of the securities
- Any income (e.g., dividend or interest) received
= Damages

Answer
Reasonable attorney fees, and other costs $300
+ Interest $0
+ The purchase price of the securities $500*
- Any income (dividend, or interest) received $15
= Total potential award under the USA $785
*The original purchase price is $500 because Bob sold the investment, thereby recovering $500 (half) of his original investment.

Investment Advice

Any investment advice in violation of the USA is also liable for civil penalties, so long as the advice was dispensed for a fee.

Those harmed by fraudulent investment advice can sue for:
+ Cost of the advice
+ Loss resulting from the advice (recovery of the investment)
+ Attorney fees (reasonable) and other costs (e.g., court costs)
+ Interest (at the state's legal rate)
- Money (e.g., dividend or interest) received
= Total liability payment.

Statute of Limitations

Under the USA, the statute of limitations for civil actions is either: three years after the sale, or two years from discovery
of the unlawful transaction.

Rescission

If an agent/person discovers a violation the USA, a letter of rescission (containing an offer to buy back the security in question) may be tendered. Of course, the letter of rescission must also take into consideration (and make an offer for) any interest potentially gained or lost.

In short, the above formulas for civil losses apply equally to letters of rescission -- with the exception that the party issuing the letter is generally trying to avoid legal fees. In addition, it is important to note that once a rescission offer is tendered, the buyer of the securities is required to respond in 30 days. Otherwise, he/she gives up all rights to future legal action.

Example

Billy, an agent of Bad Boy Brokers, Inc., discovers that he has violated the USA by misquoting dividend information
that led to the purchase of a security by a customer. Although Billy's firm has a reputation for a few run-ins with the Administrator, he is trying to help re-establish the firm's reputation as a reliable business. He realizes that his client invested $1,000, expecting a 10% dividend. Billy immediately offers to repurchase the securities, expressly through a letter of rescission. From the time that Billy sends the letter and his client agrees to sell the securities (three days), the stock appreciates $5. Billy's client sells the securities to Billy for a $5 profit Assuming no commissions are paid, what is
the total amount Billy owes his client?

Answer

First, Billy owes his client $995, as the client already received $5 in capital gains.

Second, Billy rescinded the offer in three days, but had guaranteed 10%, which would equate to $3.65 a day. Thus, Billy owes his client $10.95 in interest. Thus, Billy's total tally is $995 + $10.95, working out to $1,005.95 (assuming that the client already received an additional $5). For the sake of this example, we are not considering commissions either.

Note: "Computing the dollar amounts of awards under the provisions of the civil liabilities section of the USA is not a usual type of question on the Series 63. Just remember that under the USA, the maximum liability payment to the buyer by the seller is:

The original investment
+ The state's legal rate of interest
- Any income received from the investment
+ Court costs and attorney's fees
= Total potential payment to client by seller to the buyer.

Criminal Penalties and Other Provisions

Criminal penalties arise when a person or entity is proved guilty of a fraudulent securities transaction entailing a deliberate violation of the USA.

Once the Administrator issues an order (which may result in denial, suspension or revocation of registration), the offending person or entity may appeal the Administrator's order to the appropriate court, but must do so within 60 days of the order, under the Uniform Securities Act.

Simultaneously, the affected member (agent or broker-dealer) must serve notice of the appeal to the Administrator as well. Upon receipt of the notice of appeal, the Administrator is obligated to provide the appropriate court with all evidence relevant to the case.

Unlike the normal judicial process, once the Administrator issues an order, it remains in effect unless reversed by court order. The fact that an appeal has been filed does not negate the Administrator's order unless directed by a court. The finding of courts regarding appeals is final, and the court has the right to change any part of the order.

Conviction

If the offender is convicted of criminally violating the USA, he/she may be imprisoned for up to 3 years, or fined up to $5,000 (per violation).

Statute of Limitations

The statute of limitations for criminal penalties is 5 years.

The Uniform Securities Act provides that an Administrator may demand a firm to "require the filing of any prospectus, pamphlet, circular, form letter, advertisement, or other sales literature or advertising communication addressed or intended for distribution to prospective investors, including clients or prospective clients of an investment adviser, unless the security or transaction is exempted."

Exempted securities include:

Federal covered securities

Any security issued or guaranteed by Canada

Any security issued by a foreign national government with whom the US has diplomatic relations

Any security issued or guaranteed by a bank, savings institution or trust company

Any security issued or guaranteed by any credit union (federal or otherwise)

Any security issued or guaranteed by any railroad, other common carrier, public utility or holding company

Securities issued or guaranteed by nonprofits (e.g., church bonds)

Any investment contract issued in connection with an employee's stock purchase, savings, pension, profit sharing or similar benefit plan

Additionally, there could be a question regarding the Telephone Consumer Protection Act (TCPA) of 1991, which states that telemarketing organizations must adhere to the following requirements:

Do-not-call (DNC) lists. When a prospective caller requests to be placed on a DNC list, the firm must keep his/her name on the list for 5 years.

Telemarketing firms must make sure that its representatives understand how to use the DNC list and immediately
record any names and phone numbers of those who wish to be placed on the list.

Telemarketers may ONLY call homes of prospective clients between the hours of 8a.m. and 9p.m. in the customer's
time zone.