CHAPTER 15
State Securities Administrator: The Uniform Securities Act

North America Securities Administrators Association

The North America Securities Administrators Association is a body of state regulators each of whom is responsible for administering the provisions of the Uniform Securities Act within their state. Together they make up an advisory committee that refine and amend the Uniform Securities Act through the adoption of module rules and policy statements. NASAA is also responsible for creating the content tested on the Series 63, 65, and 66 exams. Among others some of the more testable concepts relating to NASAA's model rules and policy statements include the following:

Policy statement detailing dishonest and unethical business practices of broker dealers and agents
Policy statement relating to dishonest sales practices relating to the sale of investment company products by broker dealers and agents
Policy statement detailing requirements for broker dealers conducting business on the premises of other financial (banking) institutions
Model Rule covering unethical business practices of investment advisers
Model Rule detailing requirements for investment advisers who maintain custody of client funds

Actions by the State Securities Administrator

A state securities administrator may take action to bar, suspend, censure, or restrict the activities of a registrant if the administrator finds it in the public interest, and the applicant or registrant does one or more of the following:

Fails to pay filing fees
Is insolvent
Fails to supervise employees
Willfully violates the securities or banking laws of another country or has had a foreign regulator deny, revoke, or suspend its registration within the last five years
Violates federal securities or commodities laws
Has been convicted of any felony within the last 10 years
Has been convicted of a securities-related misdemeanor
Willfully violates any provision of the USA
Files an incomplete, false, or misleading application for registration
Has been temporarily or permanently enjoined from the securities business by a court of law
Has been subject to an order by a state securities administrator denying, revoking, or suspending its registration
Is deemed unqualified due to a lack of experience, training, or knowledge
Engages in unethical or dishonest business practices

The administrator deeming it is in the public interest is not enough to take action. The applicant must have been involved in one or more of the activities just listed. If the administrator is going to take action against the applicant, it must notify them promptly in writing of their intention and must provide a hearing for the applicant within 15 days of receiving the request for a hearing. An administrator may deny an applicant's registration based on lack of knowledge, training, or experience but a lack of experience may not be the sole basis for the denial of a registration.

Cancelation of a Registration

The administrator may cancel the registration of a broker dealer, investment adviser, or an agent if the registrant or applicant no longer exists, has ceased doing business, or cannot be located. If, for example, the administrator sends a notice to a registrant and the notice is returned to the administrator as undeliverable with no known forwarding address, the administrator would have reasonable grounds for canceling the registrations. Additionally, an individual's registration may be canceled if they have been deemed mentally incompetent by a court of law. The cancelation of a registration by the administrator is not a disciplinary or punitive action, it is more clerical in nature.

Withdrawal of a Registration

A broker dealer, investment adviser, or an agent may request that their registration with the state be withdrawn. The withdrawal will become effective 30 days after the administrator receives the request if no revocation or suspension proceedings are in process. The administrator has up to one year after the withdrawal of an applicant's registration to take action against the applicant to suspend or revoke their registration.

Actions Against an Issuer of Securities

The administrator may deny, revoke, or suspend the registration of a security if it deems it is in the public interest and:

Any officer or director has been convicted of a securities crime.
The registration statement is false, misleading, or incomplete.
The security is subject to a court injunction.
Promoter's fees or offering expenses are excessive or unreasonable.
The offering is fraudulent.

The administrator also may revoke a security's exemption from registration if it is in the public interest and the exemption was based on a false, misleading, fraudulent, or unethical practice or statement. An administrator may, without prior notice, revoke the exempt status of a securities transaction.

Rule Changes

An administrator may change or amend rules as he or she deems necessary. All rules enacted by the administrator will have the same force and effect as rules enacted under the USA. An administrator's order may be appealed to the court system by any aggrieved party within 60 days. The appeal will not act as a temporary stay to the administrator's order unless first so ordered a court. A rule enacted by the administrator applies to all registrants in the administrator's state.

Administrative Orders

If the state securities administrator issues an order, that order will be enforced against a specific registrant or activity. For example, if a broker dealer was engaging in sales practices that violated the USA, the administrator may issue an order suspending that broker dealer's registration with the state for 60 days.

An administrator may enter an order against a registered firm agent or security without holding a hearing. This is known as a summary order. A summary order may be issued in any of the following circumstances:

To deny or revoke the exemption from registration of a security or transaction
To postpone or suspend the registration of an agent during an investigation of a potential violation or registration issue pending a final decision
To postpone or suspend the registration of a security during an investigation of a potential violation or registration issue pending a final decision

If the administrator enters an order on a summary basis the administrator must send notice to all parties against whom the order was entered. The notice must provide the details of the order as well as the reasons for entering the order. The parties must also be notified that a hearing will be granted within 15 days of receipt of a written request. Once an order becomes final the administrator must provide a detail of all facts that lead to the order and the legal basis for the order. No order entered by the administrator may become final without prior written notice and the opportunity for a hearing. The administrator's order may be appealed to the court system within 60 days. The appeal will not act as a stay of the order unless a court issues a stay.

A stop order is an administrative order taken against an issuer or security which stops the security from being sold in the administrator's state. If the issuer cures or corrects the deficiency or problem with the security the stop order will be lifted and the security will be allowed to be sold. A cease and desist order is an order against a person or firm who is engaging in or about to engage in an activity the administrator deems unacceptable.

Interpretive Opinions

A person who is actively engaged in the securities business may from time to time seek the opinion of the state securities administrator to ensure that the business that they are conducting is in line with the rules of the USA as amended within the state. In response to the request, the administrator may issue an opinion regarding the activity, issue a no-action letter, or may elect not to issue an opinion. If the administrator issues an interpretive opinion, the administrator may change a fee for the interpretation of its rules.

Administrative Records

The state securities administrator will maintain all records relating to the business of the state securities administrator and will make the records available upon request. The administrator will provide certified copies if specifically requested. The administrator may charge a reasonable fee for the production and delivery of the records. The records to be maintained include:

All applications for broker dealer registration
All applications for investment adviser registration
All applications for agent registration for broker dealers and investment advisers
All applications for registrations of securities and registration statements
All orders, actions, and interpretive opinions entered
All written claims for exemptions from registration

The records may be maintained electronically, on microfilm, or on any other device the administrator may elect.

Investigations

A state securities administrator may investigate a broker dealer, a state investment adviser, or an agent in any state if they feel that a violation has taken or may take place. The administrator may also subpoena people, books, and records in any state and may administer oaths to compel people to testify. Anyone who displays contempt for the administrator's order is guilty of contumacy and may be found in contempt of court if the administrator asks the court to enforce its orders.

Civil and Criminal Penalties

A state securities administrator may issue a cease-and-desist order without a prior hearing or notice. The administrator may appoint a receiver to oversee the assets of violators and may require them to make restitution. The administrator does not have the power to arrest anyone and must refer the case to the attorney general or other office empowered to make arrests. Anyone who is found to have knowingly and willfully criminally violated the laws of the Uniform Securities Act is subject to a $5,000 fine and/or three years in prison. People who criminally violate the Investment Advisers Act of 1940 are subject to a $10,000 fine and/or five years in prison. The statute of limitations for an administrator taking action is five years.

An investor who sues for a violation of the Uniform Securities Act is entitled to receive:

The value that they paid for the securities minus any income received during the holding period (for example, dividends)
Interest on their money for the holding period
Court costs
Civil actions may be taken against:
An agent
A firm
The agent's supervisor

If an investment adviser violates the provisions of the USA, clients may sue to recover:

Advisory fees
Losses
Interest on the money
Attorney fees and court costs, minus any income received as a result of the advice

Jurisdiction of the State Securities Administrator

While the USA sets forth model legislation for state securities laws, it is the responsibility of the state securities administrator to administer the laws within their state.

The powers granted to the administrator under the Uniform Securities Act include the ability to:

Cancel, deny, suspend, or revoke a registration of an agent, firm, or security
Cancel, deny, suspend, or revoke an exemption from registration of an agent, firm, or security
Conduct investigations
Issue subpoenas
Issue cease and desist orders
Seek injunctions
Amend, make, and rescind rules and orders

Remember that the only time that a state securities administrator has any authority to investigate a federally registered investment adviser is if the adviser's principal office is located within the administrator's state. The principal office is where the executive and C-level directors maintain offices.

Administrator's Jurisdiction over Securities Transactions

The state securities administrator has jurisdiction over securities transactions that:

Originated within their state
Are directed into their state
Are accepted in their state

If a client draws a check on an out-of-state bank or if they have the securities sent to another state, that does not give the securities administrator in those states jurisdiction.

The offer and acceptance of a security constitutes a transaction or the sale of a security. It is the actual conveyance of the ownership of the security for value.

TESTFOCUS!

Mr. Jones, a resident of Texas, receives a call from his investment representative, Bob, in New York. Bob recommends that Mr. Jones purchase 500 shares of XYZ based on his company's research and in line with Mr. Jones' investment objectives. Mr. Jones accepts the recommendation and purchases the 500 shares at the market.

In this case, the securities administrators from both Texas and New York have jurisdiction over the transaction. The state securities administrator from Texas can review the transaction because the sale was directed and accepted in Texas. Additionally, the state securities administrator from New York may review the transaction because the transaction originated from the representative's office within the state.

If, in this case, Mr. Jones tells his representative that he'll think about it, then calls his representative in New York the next day from his summer home in California and purchases XYZ, the transaction would be subject to the jurisdiction of three state securities administrators:

The administrator from New York—because that is where the sale originated.
The administrator from Texas—because that is where the sale was directed.
The administrator from California—because that is where the sale was accepted.

The state securities administrator also has jurisdiction over offers of securities that:

Originated within their state
Are directed into their state

An offer is considered to have been made in the state in which it originated as well as the state to which it is directed.

If, in our example, Bob, the representative in New York, directs the offer of XYZ to Mr. Jones in Texas and Mr. Jones elects not to purchase the stock, the offer would be subject to the jurisdiction of the securities administrators in both New York and Texas. The state securities administrator in New York would have jurisdiction because that is where the representative was sitting when he made the offer. The administrator in Texas would have jurisdiction because that is where the offer was directed.

An offer or sale of a security that may be converted or exchanged into another security also constitutes an offer or sale of the security into which the original security may be converted.

The state securities administrator may:

Investigate securities-related business within their borders
Issue subpoenas for people, books, and records from any state
Compel witnesses to testify
Issue cease-and-desist orders and seek injunctions
Deny, suspend, or revoke registrations, licenses, and exemptions
Adopt and amend rules

The administrator may investigate complaints and alleged violations both in and out of their home state. The investigation may be conducted publicly or in private. During the course of the investigation, the administrator may subpoena people, books, and records from any state and may compel witnesses to testify under oath or to give a written sworn statement.

An individual brought before the administrator may not invoke their Fifth Amendment right against self-incrimination. The administrator may force them to testify about the matter being investigated. However, a person who is forced to testify may not be prosecuted based on the testimony that they were compelled to offer; a witness in this situation is given partial immunity.

If the administrator finds that a person has engaged in or is about to engage in any activity that would violate the USA, the administrator may issue a cease-and-desist order. A cease-and-desist order may be issued without a hearing. The administrator has the power to prevent violations before they take place. However, only a court of law has the authority to force compliance with the order and to prescribe penalties for violating the order.

Radio, Television, and Newspaper Distribution

An advisement, offer, or solicitation will not have been made and will be outside the jurisdiction of a state securities administrator if the following conditions are met:

The television broadcast originated outside the administrator's state.

The radio broadcast originated outside the administrator's state.
The newspaper or periodical was published outside the administrator's state.
The newspaper or periodical was published inside the state but two-thirds of its circulation is outside of the state of publication.

In the last case, the circulation numbers are based on the preceding year. If the conditions are met then the state securities administrator in the state of publication will not have jurisdiction because the advertisement, offer, or solicitation is not deemed to be made in the state where the publication originated.

Right of Rescission

If the seller of a security determines that they have made a sale of securities that violates any provision of the USA, they may offer the affected parties rescission. All offers of recession must be in writing and include an agreement to repurchase the securities at the original purchase price and must include interest for the time period that the money was invested.

If the buyer does not accept the offer of rescission within 30 days, the seller has no further liability with regard to the sale of those securities and the buyer forfeits their right to sue.

An investor's acknowledgement that a sale is in violation of the USA is never valid.

Statute of Limitations

If a buyer of a security finds that the sale of the security violates any of the provisions of the USA, the purchaser has two years from the discovery of the violation or three years from the purchase date, whichever comes first, to take action.

Chapter 15

Pretest

State Securities Administrator: The Uniform Securities Act

An administrator may require all of the following except:
1. Securities to be sold under a specific subscription form
2. An agent to take an oral exam
3. An issuer to file monthly financial reports
4. A specimen of the security
A recent college graduate has just passed their Series 65 exam. The state securities administrator may deny them registration solely based on:
1. I. Lack of experience
2. II. Public interest
3. III. Lack of training
4. IV. A felony conviction two years ago prior to the application for registration
1. I and III
2. III and IV
3. I, II, and III
4. II, III, and IV
A New York agent calls a customer who is a New Jersey resident vacationing in Florida at his hotel. The representative recommends that the client purchase 1,000 shares of ABC. The customer informs the representative that he will call him when he returns to New Jersey the following morning. On his return, the customer calls his representative and elects to purchase the 1,000 shares of ABC. Which state administrator has jurisdiction over this transaction?
1. New York and Florida only
2. New Jersey and New York only
3. New York, New Jersey, and Florida
4. New York only
A state securities administrator takes action against the principal of a firm for failing to supervise the actions of one of its agents. Which of the following is true?
1. I. The administrator may take action against the firm's registration.
2. II. The administrator may not take action against the firm's registration.
3. III. The agent's registration may be subject to action by the administrator.
4. IV. Because the administrator has taken action against the supervisor, they may not take action against the agent.
1. I and II
2. I and III
3. II and III
4. II and IV
A state securities administrator has sent a notice of its intention to revoke a firm's registration. The firm requests a hearing in writing. The hearing will be held within:
1. 30 days
2. 15 days
3. 45 days
4. 60 days
Which of the following is true regarding actions taken by the administrator?
1. I. An administrator may issue subpoenas.
2. II. An administrator may suspend a pending registration.
3. III. An administrator issues a stop order without a hearing.
4. IV. An individual who displays contempt for the administrator's order may be found in contempt of court.
1. I and II
2. II and IV
3. II, III, and IV
4. I, II, III, and IV
An administrator may do all of the following except:
1. Require the production of documents
2. Administer oaths
3. Compel testimony
4. Order injunctions
The Uniform Securities Act was designed to be enforced by the:
1. SEC
2. FINRA
3. State
4. Federal government
Which of the following are true with regard to an investor's right of rescission?
1. I. They have 30 days to accept the offer.
2. II. It may be offered verbally.
3. III. It must include an offer to pay interest.
4. IV. They may receive punitive damages.
1. I and II
2. I and III
3. I, II, and IV
4. I, II, III, and IV
An agent who willfully violates the antifraud provision of the Uniform Securities Act may be subject to:
1. I. Three years in prison
2. II. A $5,000 fine
3. III. Five years in prison
4. IV. A $10,000 fine
1. I and II
2. II only
3. III and IV
4. IV only
A client who determines that their firm has violated the USA by selling certain securities to them has how long to take action against the firm under the USA?
1. Six years
2. Two years from the discovery or three years from the triggering event, whichever occurs first
3. Five years
4. There is no statute of limitations for violations of the USA.
All of the following are violations of the USA except:
1. Buying warrants and selling the issuer's common stock short
2. Making market predictions
3. Telling a customer that they cannot lose money by purchasing Treasury bonds because their principal is guaranteed by the U.S. government
4. Printing FINRA in large letters on the firm's business card
Which of the following is a violation of the USA?
1. Cold calling a neighboring state
2. Explaining to a customer that securities listed on the NYSE are safer than nonlisted securities
3. Mailing 150 form letters to potential customers
4. Failing to withhold capital gains taxes on the sale of a security
An agent may be denied a registration for all of the following reasons except:
1. The agent is being taken to arbitration by a number of clients for allegedly mishandling their accounts.
2. The agent has a securities-related misdemeanor.
3. The agent was convicted of fraud eight years ago.
4. Its solely deemed to be in the public's best interest.
A client who takes action against an investment adviser is entitled to all of the following under the Uniform Securities Act except:
1. Reimbursement of fees
2. Attorney's fees
3. Treble damages
4. Interest on money
An agent has displayed a pattern of abusive activity. The administrator may take action against which of the following?
1. I. The agent
2. II. The principal of the firm
3. III. The firm
4. IV. Industry regulators for failing to supervise the firm
1. I only
2. I and III
3. I, II, and III
4. I, II, III, and IV
A customer who has rejected a broker dealer's offer of rescission may do which of the following under the Uniform Securities Act?
1. Reserve the right to accept the offer at a later date.
2. Sue the firm in court.
3. Take the firm to arbitration.
4. The customer has given up their rights of recovery.
A state securities administrator may take action against an issuer for all of the following reasons except:
1. The promoter's fees are excessive.
2. The registration statement is incomplete.
3. The prospects for the issuer's industry are not strong.
4. The issuer has relied on an exemption from registration based on a misleading application.
A broker dealer has withdrawn their state registration. Their request to withdraw their registration will become effective in:
1. 45 days
2. 30 days
3. 60 days
4. 90 days
An offer of securities is subject to the jurisdiction of all of the following state securities administrators except the state where the:
1. Offer originated
2. Issuer is headquartered
3. Offer was directed
4. Offer was accepted