9.15 - Penalties for Violations of the Uniform Securities Act

Under the USA, what are the maximum penalties for a securities-related felony? A) $5,000 and 5 years imprisonment. B) $5,000 and 3 years imprisonment. C) $3,000 and 5 years imprisonment. D) $3,000 and 3 years imprisonment.

Answer: B Under the USA, the maximum penalty is $5,000 and/or 3 years imprisonment for a securities-related felony.

Under the Uniform Securities Act, requirements for registration as an investment adviser in a state include which of the following? The Administrator may require an announcement of the application for registration in one or more newspapers in the state. Minimum financial requirements for federal covered advisers with a place of business in the state who have custody of customer funds and/or securities, or have discretionary authority over customer accounts. For those needing a surety bond, it must provide that any customer who can prove a violation is entitled to collect against the bond. A) I and III. B) I and II. C) I, II and III. D) II and III.

Answer: A A published announcement may be required by the Administrator. The Administrator may not impose any financial requirements upon federal covered advisers (other than to pay a fee when notice filing). The USA has specific wording requiring that customers who can prove they were the subject of a violation by the IA are entitled to collect against the bond.

Which of the following statements best describes rights of rescission under the USA? A) An investor who believes he has been wronged in conjunction with a violation of the USA may be entitled to restore his former financial condition as if the transaction had not occurred. B) An agent who unknowingly violated the USA may be imprisoned for up to five years. C) Any investor who loses money in a securities transaction can be made financially whole under the rights of rescission. D) Rights of rescission are not generally available to public customers under the USA, although such rights may be made available to institutional investors

Answer: A An investor who believes he has been wronged in conjunction with an investment transaction may have recourse under rights of rescission to restore his original financial condition. Generally, an investor exercising rights of rescission is entitled to recover the amount of the initial investment, a reasonable rate of interest on that amount, and attorney's fees, if any, less any income received on the security. An agent may not be imprisoned for unknowingly violating the USA.

An agent mistakenly sold an unregistered, nonexempt security to a customer. Which of the following actions should the broker/dealer take? Offer to buy the security back from the customer. Ask the customer to sign a customer agreement. Register the stock by notification. Offer to pay interest at an annual rate determined by the Administrator, less income paid, from the date the security was purchased. A) I and IV. B) I and III. C) II and III. D) I, II, III and IV.

Answer: A In the case of an agent who mistakenly sells an unregistered, nonexempt security, the broker/dealer should offer to buy back the security from the customer and pay the customer interest on the amount invested in the security for the period from the original purchase to the resale back to the firm, minus any income or profit realized by the client on the security. This is known as the right of rescission.

According to the Uniform Securities Act, a person who sells securities in violation of state securities laws is civilly liable for which of the following? Principal. Interest. Court costs. Attorney's fees. A) I, II, III and IV. B) I and II. C) I and IV. D) II and III.

Answer: A The person illegally selling the securities is liable for the purchase price of the securities plus interest from the date of purchase, court costs, and reasonable attorney's fees. Punitive damages will not be assessed.

An agent unintentionally sells nonexempt securities that have not been registered. Under the Uniform Securities Act, the broker/dealer may write a letter and offer to buy back the security plus interest, minus any income received. The client gives up the right against the firm to bring action in court if he does not respond within how many days of receipt of the letter? A) 30 days. B) 15 days. C) 20 days. D) 60 days.

Answer: A The right of rescission under the Uniform Securities Act allows the customer 30 days to respond to a rescission letter from a broker/dealer offering to buy back securities sold illegally. If the customer does not accept or reject the offer, the customer waives his right to bring court action against the adviser for the improper sale.

A properly licensed agent in Illinois, Missouri, and Iowa has a client who moves from Illinois to Michigan on July 1, 2012. On September 1 of that year, the agent sells him 100 shares of a nonexempt security in a nonexempt transaction. On October 1, 2013, 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: A) September 1, 2015. B) September 1, 2014. C) October 1, 2015. D) October 1, 2016.

Answer: A 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, 2012.

If an agent solicits a client to purchase nonexempt, unregistered securities, which of the following statements is NOT true? A) The employing broker/dealer must offer the right of rescission within 30 days of discovery. B) The broker/dealer who employs the agent may be sued. C) The agent may be subject to civil penalties. D) The broker/dealer may be sued if the client loses money, but if money is made the client may keep it.

Answer: A There is no specified time limit on when the right of rescission must be offered. The 30-day period is the length of time the client has, after receiving the notice, to accept or reject the offer. Agents are prohibited from soliciting sales for unregistered, nonexempt securities and any broker/dealer who employs an agent who does so may be sued. The agent may also be subject to civil penalties. If money is made, the client may keep it.

From the date of discovery, how many years is the statute of limitations in place for civil offenses covered under the USA? A) 2 years. B) 1 year. C) 5 years. D) 10 years.

Answer: A Under the civil provisions, the statute of limitations extends for two years from the discovery of the offense or three years after the act occurred, whichever comes first.

Which of the following statements describes the powers of the Administrator over the issuance of orders? A final order may be appealed in the appropriate court within 60 days of the order being issued. Appeal of a final order will act as a stay of the order, unless a court of competent jurisdiction rules to the contrary. No final order may be issued without the opportunity for a hearing. Final orders must receive approval from the state legislature. A) II and IV. B) I and III. C) I and IV. D) II and III.

Answer: B Any final order of the Administrator may be appealed within 60 days of the order. The appeal does not act as a stay of the order. Only a court of competent jurisdiction may issue a stay of the order. Because the final order is similar to passing sentence, an opportunity for a hearing must be granted. The Administrator's orders are not related to the state legislature.

Which of the following statements regarding the powers of the Administrator under the USA would NOT be true? A) In the case of non-compliance, the Administrator may apply to a court of competent jurisdiction for the issuance of an injunction. B) A final order of the Administrator may not be appealed. C) The administrator may issue cease and desist orders. D) Denial of registration may take place in the event of the filing of an incomplete application.

Answer: B Final orders of the Administrator may be appealed to the appropriate court within 60 days of the issuance of the order.

If an investment adviser representative is engaged in criminal activity while violating a rule under the Uniform Securities Act, but had no knowledge of the rule violated, the maximum penalty that may be imposed is a: A) 3 years in prison and a fine of 3 times the amount of the loss. B) $5,000 fine. C) $5,000 fine and 3 years in prison. D) $10,000 fine and 2 years in prison.

Answer: B The maximum penalty for criminal violations is $5,000 and/or 3 years imprisonment. However, no prison sentence can be imposed if the person can prove he had no knowledge of the rule being violated.

The Uniform Securities Act requires that an administrative order appeal must be requested within how many days after the order has been entered? A) 30 days. B) 45 days. C) 60 days. D) 15 days.

Answer: C Any person who receives an order from the Administrator can petition the court to change or set aside the order, but an appeal must be filed within 60 days after the order was entered.

Under the Uniform Securities Act, which of the following statements is (are) TRUE regarding civil liability of advisers and broker/dealers? The statute of limitations for civil liability is five years. A lawsuit against a broker/dealer or adviser can be avoided if restitution, costs, and interest are paid to a client. If restitution is made to a client by a broker/dealer, the Administrator may not prosecute the securities violation. A) I and II. B) II and III. C) II only. D) I only.

Answer: C Do not confuse the statute of limitations for criminal prosecution (five years) with the statute of limitations for civil liability (three years from the date of the event or two years from discovery, whichever occurs first). Since civil liability under the act is limited to restitution, costs, and reasonable interest, a lawsuit could be avoided by a return of the investor's funds plus interest. Payment of restitution to a client does not prevent the Administrator from prosecution for violating the provisions of the act.

An investment adviser is sued by a client. If the client is successful in the civil proceeding, under the Uniform Securities Act, the client may be awarded: A) the money paid for the advice, any losses resulting from the advice, and all costs and attorney's fees. B) any losses resulting from the advice plus interest, costs, and attorney's fees. C) the money paid for the advice, any losses resulting from the advice plus interest, costs, and attorney's fees, less any revenue gained from the advice. D) the money paid for the advice and all costs and attorney's fees.

Answer: C Investment advisers and broker/dealers may be sued by their clients under civil law if they lose money and the adviser or broker/dealer has violated the act in connection with the loss. The adviser or broker/dealer may be liable to the client for consideration paid, plus interest, costs, and attorney's fees, less income received. Depending upon the situation, the client may be reimbursed for any loss incurred, if appropriate. This liability may apply to the sale of a security in violation of the act or to an investment adviser who fails to register under the act, misrepresents a securities registration to a client, or employs any scheme or artifice to defraud a client. A supervisor may be held liable for the actions of those supervised.

If an investment adviser representative commits a criminal violation of the Uniform Securities Act, he is subject to legal action for: A) 10 years after the alleged violation. B) there is no statute of limitations under the act. C) 5 years after the alleged violation. D) 3 years after the alleged violation.

Answer: C Under the criminal provisions of the Uniform Securities Act, no indictment may be returned more than 5 years after the alleged violation.

An unintentional omission of material facts when offering or selling a security may result in: civil liabilities. criminal liabilities. criminal penalties. A) II only. B) II and III. C) I, II and III. D) I only.

Answer: D An unintentional omission of material facts when offering or selling a security would result in civil, but not criminal, liabilities under the USA. If the omission of material facts is willful, it can result in criminal liabilities and penalties.

The statute of limitations for criminal offenses under the USA is: A) 2 years. B) 3 years. C) 10 years. D) 5 years.

Answer: D Remember the sequence 5-5-3: 5-year statute of limitations, $5,000 maximum fine, and imprisonment for up to 3 years.

When an agent engages in a fraudulent or prohibited practice, the Uniform Securities Act provides for: criminal liability. civil liability. revocation or suspension of registration. A) I and/or II only. B) I and/or III only. C) II and/or III only. D) I, II and/or III.

Answer: D Should a registered agent engage in fraudulent or prohibited practices, the agent may be subject to criminal and civil liability as well as suspension or revocation of registration. The agent can be fined, sentenced to prison, and have his license suspended or revoked.

A sale of a security has been made by an agent not registered in the state. The agent is brought to court by the Administrator. The court has the power to require the agent to: A) go to prison for a period not to exceed three years. B) terminate his current registration. C) requalify by taking the agent's licensing exam again. D) make the client whole.

Answer: D The Administrator may bring a case to court where the agent is found civilly liable. In that case, restitution may be ordered by the court. The Administrator does not have to go to court to require the agent to retake a qualification exam. Civil cases like this would not result in a prison sentence; that punishment is for criminal cases.

An agent in Illinois, Missouri, and Iowa has a client move from Chicago to Detroit on July 1, 2012. On September 1 of that year, he buys 100 shares of a nonexempt security in a nonexempt transaction. On August 1, 2013, the client discovered that the agent's firm never licensed him in Michigan and, therefore, he is subject to civil liability to the purchaser. The statute of limitations for this sale runs out: A) September 1, 2014. B) September 1, 2015. C) August 1, 2016. D) August 1, 2015.

Answer: 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 2 years after the discovery date of August 1, 2013.

John, an investment adviser, employs an investment adviser representative who is found guilty of defrauding many of the firm's clients over a long period of time. Which of the following is (are) TRUE under the Uniform Securities Act? The investment adviser representative is subject to criminal penalties specified in the act and to civil liabilities resulting from clients who sue as a result. John may be subject to civil liabilities resulting from actions taken by the investment adviser representative. John is not subject to civil liabilities as a supervisor if he can prove that he had no knowledge of the actions of the representative and while exercising reasonable care, he could not have had knowledge of the violations. A) I and II. B) I and III. C) II and III. D) I, II and III.

John, an investment adviser, employs an investment adviser representative who is found guilty of defrauding many of the firm's clients over a long period of time. Which of the following is (are) TRUE under the Uniform Securities Act? The investment adviser representative is subject to criminal penalties specified in the act and to civil liabilities resulting from clients who sue as a result. John may be subject to civil liabilities resulting from actions taken by the investment adviser representative. John is not subject to civil liabilities as a supervisor if he can prove that he had no knowledge of the actions of the representative and while exercising reasonable care, he could not have had knowledge of the violations. A) I and II. B) I and III. C) II and III. D) I, II and III.