Series 65 Unit 5
What does the scope of liability refer to?
It means that liability for the violation extends beyond only the IAR or agent conducting the transaction, the IA or BD is also liable for damages.
Under what circumstances should instate administrators aid out-of-state Administrators in an investigation of BDs in their home state?
Only when the violation the out-of-state Administrator is investigating is also a violation under the terms of the instate Administrator's USA regulations.
What civil and criminal liability appeal rights do persons have?
Persons have 60 days to appeal after receiving an order of the Administrator
What 12 reasons could justify an Administrator denying, revoking, and/or suspending the license of a BD or IA?
(1) Falsification of items on registration paperwork, (2) violation of USA laws, (3) conviction of securities violations, (4) failure to pay filing fees, (5) conviction of a felony, (6) past legal agreement to not engage in securities dealings, (7) sanction by another Administrator, (8) engaged in securities fraud, (9) insolvency, (10) violation of other laws such as the Securities Act of 1933, etc, (11) failure to supervise company activities appropriately, and (12) is not qualified on the basis of knowledge or experience.
What are the 5 exclusions from the definitions of a sale and offer to sell under USA?
(1) Gift of nonassessable stock, (2) pledge of security as collateral for a loan, (3) stock dividend, (4) restructuring of securities as voted on by stockholders, and (5) stock splits or related reorganization of shares.
What are the 3 reasons an Administrator might cancel a registration OUTSIDE of violations?
(1) The applicant died, (2) the common enterprise dissolved, or (3) the IAR or agent was ruled mentally incompetent.
If an agent or IAR's license was suspended because their parent IA or BD is dissolved, How long can the license remain suspended before it expires entirely?
2 years
What is the difference between a rule and order?
A rule applies to every entity under the definition outlined in it while an order applies to a specific instance. All rules and orders created by the Administrator must be published for all parties to view.
What is the difference between a sale and an offer to sell?
A sale is the actual exchange of currency or otherwise for a security. An offer is anytime a person attempts to convince another party to buy a security.
Under the USA, which of the following statements regarding the withdrawal of an IAR's registration is TRUE? The withdrawal automatically becomes effective 90 days after filing. If disciplinary action is initiated within 30 days after filing, the automatic effective date may be delayed. The Administrator may institute disciplinary proceedings within one year after the effective date of the withdrawal II and III I, II, and III I and III I and II
A. A registered person may apply to withdraw the registration. The withdrawal is effective in 30 days, unless the person is under investigation in connection with pending disciplinary action or an investigation is instigated during the 30 days after filing the application to withdraw. If there is an investigation underway, the Administrator will determine when the withdrawal will become effective. The Administrator has one year from the effective date of withdrawal to begin disciplinary actions for violations of the act.
Wayne and Grayson, LTD., is a broker-dealer with offices in Gotham, New Jersey. They place an ad for a new securities issue in the Gotham Gazette. Approximately 55% of the Gazzette's readership is in Delaware. Under the USA, jurisdiction over this ad would lie with The Administrator of New Jersey The Administrator of Delaware The Administrator of both New Jersey and Delaware Neither
A. Although more than half the readers of the Gazette live in Delaware, under the terms of the publishing and broadcast exemption of the USA, the offer is not made in Delaware because the paper is not published there. Therefore, the Administrator of New Jersey has sole jurisdiction over the offering. If more than ⅔ of the circulation was outside of New Jersey, no state has jurisdiction.
If an investment adviser representative commits a criminal violation of the Uniform Securities Act, she is subject to legal action for 5 years after the alleged violation 3 years after the alleged violation 10 years after the alleged violation the sooner of two years after discovery or three years after the violation
A. This is a perfect example of how important it is to read the question very carefully. Notice that this is a criminal violation, not a civil one. Under the criminal provisions of the Uniform Securities Act, the statute of limitations is five years after the alleged violation. Do not confuse this five years with the maximum prison sentence of three years. Further, this is different from the statute of limitations for a civil case. That is the sooner of two years after discovery or three years after the infraction. Under federal law, the civil statute of limitations is slightly different. For federal civil cases, it is the sooner of one year after discovery or three years after the infraction.
What does acting summarily entail and trigger?
Acting summarily is when the Administrator makes a unilateral judgment. From the day the securities representative gets the decision, they have 15 days to appeal for a hearing.
What does it mean to say the Administrator is a regulatory body and not a legal one?
Administrators are judicial bodies, they make rules and recommendations regarding statutes but cannot levy criminal charges. That is left to district attorneys ultimately.
What can Administrators not change about the USA? Give an example
Administrators can change the way persons have to compile with USA laws but they cannot change the law itself. Each state's USA law is ultimately written by the state legislature.
What is an offer to sell?
An offer to sell is any time a person proposes a client buy a security or execute investment advice related to buying a security.
What is assessable stock? What does it relate to?
Assessable stock, which is no longer in circulation, was issued to investors at a discount in exchange for the issuer's right to extract value from the stock at a later date. It relates to the fact that gifting assessable stock was considered an offering and sale of a stock, likely related to the fact that ownership of the stock constitutes a potentially liability in the future.
What is the statute of limitations under the USA? What happens if the client dies before the statute expires?
It is 3 years. If the client dies prior to that, the statute of limitations still does not expire until the 3 years is over.
A registrant's registration may be canceled by the Administrator when the registrant has been found in violation of the Uniform Securities Act if the Administrator is unable to locate the registrant upon the order of a court of competent jurisdiction as long as there is opportunity for a hearing
B. Cancellation is nonpunitive—nothing wrong was done. But when the Administrator is unable to locate the registrant, or the registrant is declared mentally incompetent or is deceased, registration is canceled.
As defined in the Uniform Securities Act, the term "offer to sell" would include a gift of nonassessable stock. a gift of warrants. the sale of U.S. Treasury bills. the attempt to sell gold coins.
B. Even though a gift is not normally a sale or an offer to sell, when it is of a warrant, a right, or any convertible security, it is considered to be an offer to sell the underlying security. Although a gift of assessable stock is considered both a sale and an offer to sell, a gift of nonassessable stock is simply a gift. A sale of Treasury bonds is a sale, not an offer, and the attempt to sell gold coins is an offer to sell, but not of a security, and the USA is only concerned with an offer to sell a security.
Which of the following powers are under the jurisdiction of the Administrator? Performing an annual audit of broker-dealers registered in the state Issuing a cease and desist order to an agent without any prior notice Performing an annual audit of investment advisers registered in the state Issuing a final order suspending the registration of a person as long as, upon written request, a hearing will be granted in no more than 15 days
B. Whenever it appears to the Administrator that any person has engaged, or is about to engage, in any act or practice constituting a violation of any provision of the USA or any rule or order hereunder, he may in his discretion issue a cease and desist order, with or without a prior hearing against the person or persons engaged in the prohibited activities, directing them to cease and desist from further illegal activity. Any person aggrieved by a final order of the Administrator (that means after the hearing has taken place) may obtain a review of the order in the appropriate court by filing a written petition in court, within 60 days, not 15, after the entry of the order. Broker-dealers and some IAs have to file annual audited financials with the Administrator, but the audit is conducted by an independent accountant, not the Administrator.
An Administrator may deny or suspend a registration in all of the following situations EXCEPT.. if the registrant has failed to properly supervise agents and investment adviser representatives if the applicant was convicted of a misdemeanor involving securities within the last 10 years if the applicant is not qualified on the basis of experience if the applicant has been the subject of an adverse order entered by the Administrator of another state within the past 10 years
C. The Administrator may restrict a registration on the basis of lack of training and knowledge, but not for a lack of experience alone. The Administrator may deny a registration if the applicant was convicted of a misdemeanor involving securities within the last 10 years. The Administrator may deny a registration if the applicant has been the subject of an adverse order entered by the Administrator of another state within the past 10 years. Registrations may be suspended if agents or investment adviser representatives are not properly supervised.
John was convicted 5 years ago of failure to pay child support, a misdemeanor in his home state. John would now like to register as an IAR in a neighboring state where that crime is considered a felony. Under the Uniform Securities Act, the Administrator of the neighboring state will consider granting registration to John, but only if he receives heightened supervision determine John's status on the basis of the extent to which his child support payments are being paid disregard that conviction when determining John's qualifications for registration consider John to be statutorily disqualified because in this state his crime is a felony
C. The conviction on John's record is for a non-securities-related misdemeanor. The fact that the same crime is a felony in another state is not relevant to John's application for registration in that state.
What is the difference between a stop order and a cease and desist order?
Cease and desist orders are sent to persons while stop orders apply to applications for security registrations.
What is contumacy? What does it relate to?
Contumacy is a refusal to comply with orders like subpoenas. In the case of contumacy, Administrators can petition relevant courts to ask for help. If the court rules in the favor of the Administrator, failure to comply can result in contempt of court.
What is the phrase "as a bonus on account of" in reference to?
It is in reference to the fact that a transfer of securities peripheral to purchase of another principal item is still considered the sale of security i.e. a car dealership sweetening a car deal by offering $1000 worth of corporate bonds with the sale.
When an Administrator acts summarily to postpone or suspend a registration of a security, which of the following statements is (are) TRUE under the Uniform Securities Act? The suspension will not go into effect until after a hearing. The registrant must be promptly notified of the action and given an opportunity for a hearing. A hearing must be held within 15 days of written request of the registrant. I and III I, II, and III I only II and III
D. Acting summarily means acting without prior notice. An Administrator who has grounds may postpone or suspend a registration by issuing a stop order. The registrant must be promptly notified of the action and of the opportunity for a hearing. The hearing must be held within 15 days of a written request, and the suspension will remain in effect until final disposition.
Under the USA, a sales agent's registration may be suspended by the Administrator for all of the following reasons EXCEPT the agent is convicted of willful violations of the USA the agent is enjoined by a court of law from engaging in the securities business it has been discovered that the agent is not properly supervised the agent is accused of violations of the antifraud provisions of the USA
D. An accusation is not grounds for suspension, unlike convictions, court injunctions, and lack of supervision.
PPI, headquartered in State J, has sent an announcement to a number of BDs in the state promoting their 8% promissory notes as a high interest nonsecurity alternative to a bank CD. The compliance officer of your firm forwards this to the State J Administrator. What action would the Administrator likely take? Issue a cease and desist order against the compliance officer with or without a hearing Issue a cease and desist order against PPI with or without a hearing Issue a stop order against the compliance officer after giving the opportunity for a hearing Issue a stop against PPI after giving the opportunity for a hearing
D. Since the order should be against the issuer, it should be a stop order. Stop orders also require hearings while cease and desist can be accompanied by hearings but do not need to.
An Administrator has specific authority under the USA to I. suspend the registration of a security if the suspension is in the public interest and the offering has excessive underwriting fees II. issue emergency injunctions to prevent a violation of the act III. enforce subpoenas in the state at request of an Administrator of another state for alleged violations that occurred in another state IV. require that the proceeds from an offering be held in escrow until the issuer receives a certain percentage of the sale of the securities offered I, II, and IV II and III I only I, III, and IV
D. The Administrator may impound the proceeds of an offering in an escrow account until the issuer receives a specified amount. The Administrator may also suspend a security's registration if excessive fees or commissions are charged as part of the offering. State Administrators have the authority to cooperate with each other in enforcing the provisions of USA by ensuring that the subpoenas from other states are enforced. Injunctions are judicial orders that can only be issued by a court of law, not by an administrative agency such as a state securities Administrator.
Jane is only registered as a BD in State A and has a State-A based client, who spends the winters in State C. Jane has no clients that reside in State C. Jane sends a research report to her client with a strong recommendation to buy XYZ stock. The client calls Jane with an order to purchase 100 shares of XYZ. Jurisdiction over the transaction belongs to State A Administrator State C Administrator Neither Both the State A and C Administrators
D. The offer to sell originated in State A so Jane must be registered there. Even though Jane is not registered in State C, and does not need to register because of the snowbird exemption, State C has jurisdiction over the transaction because the offer to sell was directed to State C and accepted in State C.
A properly licensed agent in Illinois, Missouri, and Iowa has a client who moves from Illinois to Michigan on July 1, 2014. On September 1 of that year, the agent sells him 100 shares of a nonexempt security in a nonexempt transaction. On October 1, 2015, the client discovers that the agent's firm never licensed him in Michigan and that the agent is subject to civil liability to the purchaser. The statute of limitations for this sale runs out on October 1, 2017 September 1, 2016 October 1, 2018 September 1, 2017
D. The statute of limitations for civil liability is the earlier of 3 years after the date of the sale or 2 years after discovery of the violation. In this case, the earliest date is 3 years after the sale on September 1, 2014.
What does "enjoined" mean?
Enjoined the person that is the subject of an injunction.
True or False: Administrators can deny, revoke, and/or suspend an IA's or BD's license for the public interest
False, there must be specific reason beyond that
What is a final order? What is not a final order?
Final orders are when the securities person has been found guilty or innocent of violation. Final orders cannot be the result of summary powers and must follow (1) appropriate notice as to the denial, suspension, or revocation, (2) the opportunity for a hearing, and (3) the right to the findings of the law.
Define fraud, be specific.
Fraud is the deliberate concealment, misrepresentation, or omission of information to deceive another person for unlawful gain.
How are gifts of stocks viewed by Administrators? Why is this important?
Gifts of nonassessable stock are NOT considered stock sales, but gifts of assessable stock (a now defunct form of stock) are considered stock offers and sales. It is important to note because, again, the types of stock are considered totally differently
If the Administrator finds a client has been sold securities in violation of the USA, what 4 things may there receive?
IAs can be made to pay back their fees for investment advice, as well as, what BDs have to pay back which are (1) interest determined by the state, (2) any potential loss due to market value changes on the security, (3) income generated by the security while held, (4) all court fees they paid out to receive the ruling, and (5) the original purchase price
When does an Administrator not have jurisdiction over offers to sell over TV, radio, and newspaper-broadcast?
If the camera filming is out of the state, the newspaper was published out of state, or the microphone capturing the radio broadcast is out of state, the instate Administrator does not have jurisdiction. In addition, if the newspaper were published within the state but 66.7 percent of the circulation was outside of the state, the instate Administrator would not have jurisdiction.
What is a blue-sky law?
Specific state regulations that the USA allows each state to tweak
What 4 broad powers do Administrators have to enforce the USA?
The Administrators can (1) issue rules and orders and require the use of specific forms, (2) issue cease and desist orders, (3) revoke, suspend, cancel, or deny registrations and licenses, and (4) conduct investigations and issue subpoenas.
What are the SEC's six main enforcement powers? What are the maximum criminal penalties they can seek?
The SEC can (1) subpoena witnesses, (2) acquire evidence, (3) subpoena books and records, (4) administer oaths, (5) petition an injunction against persons until a hearing, and (6) petition a court for criminal prosecution. The max criminal penalty for violation of an SEC regulation is 10,000 dollars and 5 years in prison.
What is the difference in the criteria for denying, revoking, and/or suspending a security's registration compared to a BD or IA's?
The main difference is that a security might be denied, etc if the securities are associated with fees that are excessive or unreasonable.
What is the maximum penalty and jail sentence for violation of the USA?
The max penalty is a 5000 dollar fine and 3 years in jail
What is the right to rescission? What time frame applies to it?
The right to rescission is a deal offered by the seller of securities to a party they wronged during the sale. It offers the buyer the option to sell back the securities for the original purchase price, plus interest. The buyer has 30 days from the offer to respond.
What limits are placed on Administrators' ability to deny, revoke, and/or suspend licenses?
The securities representative has the right to (1) appropriate notice as to the denial, suspension, or revocation, (2) the opportunity for a hearing, and (3) the right to the findings of the law.
What constitutes jurisdiction over a security sale or offer to sell?
There are 3 potential criteria: (1) the offer to sell occurred in the state, (2) the sale of the stock took place in the state, and/or (3) the offer to sell is directed to the state.
What authority do officers of the administrator have during an investigation regarding a breach of USA regulations, 5 things?
They can (1) travel across state lines during their investigations, (2) require witness statements in writing, (3) publish facts about the investigation, (4) subpoena witnesses, and (5) take evidence and require documents.
Explain the ability of an Administrator to deny an applicant's license as an IAR based on a lack of knowledge or experience
This rule typically applies to an agent or BD who tenders investment advice beyond what the Administrator deems is within their professional expertise. It can also apply to a ruling on lack of knowledge because the Administrator does not have the confidence that the person will have enough of a chance to gain the experience in a timely fashion
What are trebel damages?
Trebel damages are damages 3 times greater than those incurred. They apply in other legal matters but not in securities cases.
What does "vacated" mean?
Vacated means lifting sanctions such as the BD paid the filing fees and issuance can continue.