Series 63 Study Guide
Post 5 of 7
- Module 1: Definitions from the Uniform Securities Act
- Module 2: Securities Act regulates broker-dealers and the agents
- Module 3: Investment Advisers and their representatives
- Module 4: Securities registration, exemptions, and their issuers
- Module 5: Administrative provisions and remedies
- Module 6 - Customer and prospects communication
- Module 7 - Obligations and ethical practices
Post 5 of 7 in the Series 63 Study Guide
The Series 63 exam doesn’t test individual state regulations but instead those principles found across the U.S.
Let’s look in this section then at provisions as set out in the Uniform Securities Act and remedies at the administrator’s disposal.
To start, we know that a state administrator has jurisdiction over securities transactions that are accepted in a state or originate there.
They can make orders, regulations, and rules regarding this but also have further powers, for example, conduct investigations or issuing cease and desist orders.
The authority held by a state administrator
Among the responsibilities of this administrator are:
- Administer securities laws
- The investing public is looked after and the investment climate is kept favorable through rules and the issuing of orders
For the exam, remember that they also have jurisdiction over registrations of professionals and securities.
We look at their powers by looking at the terms sale or sell and offer or offer to sell.
This will help define where the authority of the administrator lies.
Offer to sell or offer
What is an offer to sell?
This is when there is interest in a security for a certain value, a solicitation of an offer to buy securities, or an offer is made to dispose of securities.
For the Series 63 exam, remember the following:
- If a bonus or something is given with the delivery of the securities, it is considered to be part of the subject that’s purchased.
- In the case of assessable stock, it is considered to be an offer and a sale if given as a gift.
- It is considered an offer when a warrant offer or sale, or right to subscribe or purchase to another security and all sales or offers that provide the holder with a present or future right to convert into securities.
- The security offered is called the offeree while the party attempting to make the sale is the offeror.
Sale or sell
A sale or sell is considered as every contract to sell, contract of sale, interest in a security for value, or disposition of a security.
With an offer to sell, it’s a sale attempt even if a transaction has not yet taken place.
In both cases of a sale or an offer, registration is necessary for the person making them.
So a car salesman, for example, won’t be able to include $10,000 corporate bonds as part of a sale if you buy their car unless they are a registered broker-dealer too.
Assessable stock as a gift
When a gift of assessable stock is given, an administrator will have jurisdiction over it too.
This is because the balance of the par value payment can be demanded either by the issuers but more likely by the creditors.
Terms offer, offers to sell, sale or sell exclusions
These are not included in these terms:
- Loan or bona fide pledge
- Non-assessable stock given as a gift
- Stock dividends (including stock splits) when made up of nothing of value provided by the stockholders.
- Class vote by stockholders
The legal jurisdiction of an administrator
Administrators must have legal authority to act if they are to have authority over securities sales.
The jurisdiction given to them is the legal authority to regulate securities activities.
In a state, this jurisdiction applies when:
- An offer to sell is made, or
- An offer to buy is accepted afterward
No matter if either party is in the state or not, the critical thing is that the offer originated there for the offer to buy or sell to be made in the state.
Buy or sell offers are then accepted at the point that the offeree accepts the offeror’s terms.
An offer to buy or sell a security, and also any acceptance of that offer, is seen as such if it:
- Originated in the state of the administrator
- Is accepted in the state of the administrator
Note also that because transactions might involve several states, more than one administrator might be involved.
Publishing and broadcasting: Jurisdiction exemptions
There are some special rules that govern when offers are made on TV, radio, or through the newspaper.
Should any of the circumstances listed below be how the offer was made, administrators have no jurisdiction:
- The broadcast on either radio or TV came from outside the state
- The newspaper/periodical was published outside the state
- If published in the state, over the last year two-thirds of its circulation comes from outside of it
Publications are not considered bona fide if they are distributed to subscribers who have signed up to receive them and they would be excluded from the provisions above.
Sales and advertising sales literature filing
The administrator also oversees sales and advertising filings.
They therefore have jurisdiction over the filing of pamphlets, circulars, form letters, advertisements, or other advertising communication or anything intended for clients or prospective clients.
This is unless it is an exempt security, federal covered security, or transaction.
Administrators perform many types of administrative actions as outlined by the Uniform Securities Act.
They have four powers to help enforce it:
- They can create, revise and repeal various rules and orders
- They can investigate situations if necessary and hand out subpoenas if need be
- They can deal out cease and desist orders. They can also seek injunctions
- They have power over registrations and licenses including the ability to revoke, suspend, cancel or deny them
The administrator and staff cannot make personal gain other than their regular remuneration due to their position.
Forms, orders, and rules
Administrators will create, revise and repeal various rules and orders while administering the provisions of the Uniform Securities Act.
These rules have the same authority as the act, but won’t be seen as a part of it.
Is there a difference between rules and orders, however?
Well, yes, and here’s how we define them.
- Rule: An administrator rule applies to everyone
- Order: An administrator order applies to a specific instance
They do not have the power, however, to change state blue-sky laws, just the power to create rules and orders to see that these laws are complied with.
Proceed with investigations/issue subpoenas
Administrators have broad discretionary authority when it comes to investigations and issuing subpoenas.
Investigations can be carried out outside state borders too.
They might be public or private, depending on the circumstances and as decided by the administrator.
During an investigation:
- Administrators can request statements from relevant parties
- Administrators can make various circumstances and facts public
- Administrators can subpoena witnesses
- Administrators can ask for the relevant documents to be provided for evidence
We need to talk about contumacy with regards to investigations.
Contumacy happens when the investigation’s subject refuses to provide the requested information or ignores the subpoena.
In this situation, the administrator can approach the appropriate court in their state.
In turn, the court will issue an order to the individual concerned and this means they must comply with any administrator requests they receive.
Failure to do so is disobeying a court order which could even mean jail time.
Also, administrators can execute subpoenas from other states.
The administrator may only issue and enforce a subpoena if the alleged violation for the information sought occurred within his state.
This is at the request of another state administrator or SRO.
Issue cease and desist orders
With no need for a hearing, administrators can issue cease and desist orders whenever necessary.
This allows them to stop potential violations early and allows them to act on information they may have received so as to protect investors.
Administrators do not have the legal power to make the relevant parties comply with the order, however.
They can turn to a court of competent jurisdiction if they need help in that regard to request an injunction.
In the event that compliance is not achieved, penalties will then be imposed.
An individual who is subjected to an injunction is enjoined (a legal term).
A receiver or conservatory can be appointed over the assets of the person who receives the injunction.
The revoking, canceling, suspending, and denying of registrations
Among the administrator’s many responsibilities are the registration of securities issues, broker-dealers, investment advisers, and any of their representatives.
They have some important powers in this regard.
For example, if necessary, they can revoke registrations.
They can also cancel, suspend or deny them.
Let’s examine their power in relation to each group.
We’ll start with brokers, advisers, and their agents.
A securities professional’s license must be denied, suspended, or revoked for two reasons.
Firstly, the order must be in the general public’s interest.
Second, the administrator must find that the party (parties) involved, whether it be an adviser, broker-dealer, or representative has:
- Submitted a misleading or incomplete application
- Intentionally violated the Uniform Securities Act
- In the last decade been convicted of a misdemeanor that is securities-related
- Not trained properly, not having sufficient experience or not having the knowledge regarding securities and as such, is not qualified
- Suffered suspension, denied or revoked by another state administrator
- Been declared insolvent recently
- In the last decade been convicted of a felony
- Being enjoined from engaging in the securities business
- Participated in unethical or dishonest securities practices
- Having been found guilty of failing to supervise agents or advisers
In the event a registrant or applicant has the necessary training, knowledge, or combination of both to qualify, an order cannot be entered based on a lack of experience.
Moreover, a registration cannot be suspended or revoked for reasons known to the Administrator when the registration became effective.
The difference in state criminal laws can affect the registration of securities professionals.
They may, for example, have been convicted of a misdemeanor in one state, which is only a felony in another.
When applying for registration, it’s the statutes of the state where the crime occurred that should be considered.
The state where they are applying has nothing to do with it.
This means it’s what is on an applicant’s record that the administrator should always consider.
Also, remember for the exam, registration could be denied if the person was previously disqualified by any SRO.
Applicants must always disclose any felonies or charges against them, even if more than a decade old.
Last but not least, a denial must always be for a reason other than “in the public’s best interest.”.
Administrators cannot pass a denial if that’s the only reason.
Other than the case where they are acting summarily, administrators cannot issue revocation, suspension, or denial orders without:
- Prior notice is provided to the registrant or applicant. Notice must be given to their employer too.
- The opportunity of a hearing
- Conclusions of law and written findings
If the person is an investment adviser representative or an agent, the administrator’s notice of the final order must be sent to the employer.
Administrators have the power to act summarily.
Let’s look into this in greater detail than before.
What does it mean?
They can suspend or postpone a registration without a hearing process.
It is important to remember, however, that based on the actions described above, that can only take place once the final determination of any proceedings has been made.
If the administrator enters into a summary order, the registrant or applicant is promptly notified.
In the case of an agent or investment adviser representative, their employer needs to be notified as well as the reason why the administrator has taken this step.
The administrator can set up a hearing if they receive a written request from the registrant or applicant or they can do it on their own.
They have 15 days to do so.
The order remains in effect until it is either vacated or modified by the Administrator if they do not request a hearing.
Our discussion earlier touched on applicants’ lack of experience and how an administrator cannot deny them based on it.
However, what if qualifications are lacking?
The administrator may consider that if someone is registered as a broker-dealer, they do not qualify as an investment adviser.
The administrator may restrict a broker-dealer’s registration with certain conditions in place so that they cannot function as an investment adviser.
What should be taken from this is that someone with broker-dealer or agent experience is not qualified to give investment advice.
The law requires them to only act in the capacity in which they are qualified.
When it comes to securities issues, we can now look into the administrator’s jurisdiction over them.
Administrators can revoke, cancel, suspend or deny a security’s registration.
This is an option when:
- A registration statement is filed that is incomplete
- A misleading registration statement has been filed
- Offerings are made on unfair, unjust, or inequitable terms
- It is a fraudulent offering
- The offering fees are that are charged are unreasonable
- A conviction for securities-related offenses has ever been imposed on the control person
- The securities have a court injunction against them
- If any illegal business practices are associated with the security system
- Another state administrator has a stop order against the security
- The applicant’s filing fee has not been paid
Nonpunitive terms of registration
Even if the Uniform Securities Act hasn’t been violated, registrations can be canceled.
There could also be a withdrawal request in addition to a lack of qualification as the reasons for this cancelation.
The registration of a security can be withdrawn by a securities professional.
The withdrawal will be effective for 30 days.
This is as long as the securities professional making it has no revocation proceedings against them or isn’t currently suspended.
Should the administrator at a later date obtain evidence of improper activity, they can put in a suspension or revocation proceeding within one year of the withdrawal date.
Remember that someone whose registration has been withdrawn still will have administrator jurisdiction over them for the next year.
Instead, the administrator may choose to cancel the registration.
This will happen when the registrant or applicant ceases to transact business or ceases to exist or if they are declared mentally incompetent.
In addition, it is important to know how cancellation differs from denial, suspension, or revocation.
An administrator will opt to cancel a registration because of:
- Mental incompetency
The other options are punishments, while cancellation is not.
Note that if a broker-dealer is suspended, any agents working for them are as well, up until the suspension is lifted.
This is true for investment advisers and their representatives too.
When the registration is revoked, however, to have their suspensions lifted, they will have to find someone else to affiliate with.
In the case of the firm having its registration revoked, the individual will need to find a new affiliation to have their suspension lifted.
Opinions and administrative files
Documents received by the administrator are considered to have been filed.
Here’s how the administrator maintains the records that they receive.
These records include:
- The registration of securities
- The registration of broker-dealers
- The registration of investment advisers, and their representatives
- Exemption from registration requirement written notice claims
- Entered orders under the Uniform Securities Act
- Interpretative opinions issued by the administrator
- Non-action determinations issued by the administrator
Let’s talk about how copies should be kept available.
A reasonable fee should be charged by the administrator when copies are requested and they should be readily available.
If requested, these copies can be photostatic and should be certified by the administrator under their seal.
Certified copies are prima facie evidence of the document or entry they are copies of.
Any prosecution or proceeding under the Uniform Securities Act may use them.
We should also discuss interpretive opinions.
The administrator may honor requests for interpretative opinions at their discretion.
Furthermore, they may decide not to pursue enforcement proceedings related to specific activities that have been engaged in.
The determination, however, must be made in accordance with the Uniform Securities Act provisions and policy.
Other liabilities and penalties
This section will discuss what happens when an investor purchases a security that violates the Uniform Securities Act or if they receive investment advice that violates it too.
What are their rights of recovery under the law?
Liabilities and penalties
A violation of the Uniform Securities Act can result in both criminal and civil penalties.
Clients are also entitled to compensation if they suffer financial loss from an investment adviser’s actions in violation of the provisions as set out in the act.
Similarly, if an agent or investment adviser representative violates the act’s stipulations, the administrator can also be held liable.
Civil liability can also be imposed on those who violate the Uniform Securities Act.
As a result, the purchaser can sue the seller to recover any losses.
They can do so if:
- Security sales violated the Uniform Securities Act’s registered provisions
- An unregistered nonexempt security was purchased in violation of the Uniform Securities Act
- During the sales presentation, the securities profession has made a false statement of material fact or they have chosen to omit vital information
- Both the broker-dealer and agent have committed a civil infraction
- The securities were sold to them by an unregistered agent
- The securities were sold in violation of a rule or order of an administrator
There are a lot of reasons why an investor can choose to file a civil lawsuit.
But the administrator can do so as well.
One potential reason could be to stop the use of materials that should have been filed with the administrator but haven’t been, or to prevent their publication or circulation.
When it comes to civil actions, there is a statute of limitations.
A period of three years is allowed for civil provisions following the sale or the giving of investment advice.
After the violation is discovered, there is also a two-year period to consider.
Therefore, whichever of these two situations above comes first is the statute of limitations.
When securities sales that are ruled improper, what rights of recovery does an investor have?
When they feel there has been a violation in the sale of securities, a purchaser can file a complaint with the administrator.
Upon finding merit in the case, the administrator will launch an investigation.
If the investor wins, they can recover:
- Their purchase price (the term for this is “made whole”)
- Interest (the rate of interest is decided by the administrator and is called the “legal rate”)
Securities that generate income for the investor while held cannot be kept.
We must cover rights of rescission when it comes to the sale of securities also.
Securities that were sold in violation of the Uniform Securities Act may be repurchased by the seller.
By doing so, they are said to have given the buyer a right of rescission.
However, they won’t pay the seller the amount they originally paid.
The administrator will add interest at his or her discretion.
The seller can avoid a lawsuit by exercising their rescission rights.
But the buyer still has a role to play.
Upon receiving a letter of rescission, they have 30 days to respond to it, either accepting or rejecting the seller’s offer.
A lawsuit can’t be filed by the buyer at a later date if they fail to act within the 30-day period.
If the buyer accepts the seller’s offer, the buyer can recover:
- The purchase price they paid
- Interest determined by the administrator
- Court costs and attorney fees
And rights of recovery when given the wrong investment advice?
If advice has led to them buying a security that violates regulations, they have legal recourse and could sue the adviser.
This means they can recover
- The amount they were charged
- Losses incurred as a result of following that advice
- Interest derived from the date the advice was paid for as determined by the administrator
- Attorney fees
It would be deducted from the amount they receive back if they gained any income from the poor advice.
There are rights of rescission for poor investment advice as well.
An investment adviser may suggest this to a client if they have given advice that they are aware might result in civil action against them.
The client must receive a refund of the amount that they were charged for the advice.
Any losses will also have to be refunded if any occur.
Furthermore, interest will be accrued to all money paid back, to losses incurred (if any), as well as to the original payment at a rate decided by the administrator.
The client will lose any money made off the investment advice.
If the client accepts or rejects the rescission letter, the 30-day rule applies as mentioned earlier.
Unlike some federal laws, the administrator does not provide that investors affected by bad advice or by the sale of securities in violation of the Uniform Securities Act receive treble damages.
Let’s examine the scope of liability when there is a violation of the Uniform Securities Act.
You might think it applies to the person who provided the investment advice or sold the securities.
Actually, the people that directly or indirectly control that person will be deemed liable as well.
If it can be proven that someone in control of an agent or investment adviser representative has been irresponsible, action can be taken.
Partners and officers can be included in this too.
Finally, let’s look at surety bonds.
If a customer can, within the statute of limitations, show a violation, they will be able to collect against the bond.
Civil and criminal liability and Uniform Securities Act violations penalties
If the Uniform Securities Act is violated, there are a number of civil, criminal, and other penalties that may apply.
People who are found guilty of engaging in fraudulent securities transactions can face criminal penalties and these are imposed by the court.
Penalties could include:
- A fine of up to $5,000
- A prison sentence of up to three years
- A fine as well as a prison sentence
An individual who proves that they had no prior knowledge of the order or rule that they have been convicted of cannot be imposed any punishment and may only be fined.
An administrator’s office cannot arrest anyone, but can contact authorities to act, such as obtaining an arrest warrant, if necessary.
A state prosecutor will determine whether any common law, other laws, or part of the act has been broken.
Typically, the state attorney general makes the decision.
In the event that the case goes to court and a guilty verdict is reached, the court will decide the sentence.
Statute of limitations
Under the Uniform Securities Act, the statute of limitations is five years from the date of the offense.
The majority of cases that go to court involve fraud.
Anyone who receives an order from the administrator can appeal it.
It must be done within 60 days of receiving the order and in writing to the appropriate court.
Unless the court rules otherwise, the order will still take effect in the event of an appeal.