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Overview 10% of the Series 63 examination (6 questions) covers administrative procedures and the scope of the Act. This portion of the Act details the reasons why one's registration can be rescinded and the liabilities one incurs for violations. 

Intro Video 

Why Registration Can Be Denied Registration Will Be Rescinded if It Is in the Public Interest The Act empowers the State Administrator to deny, suspend, or revoke the registration of any broker-dealer, agent, investment adviser or investment adviser representative if he finds that such an order is in the public interest and that person has: Filed a misleading application, which is interpreted as a materially incomplete application or one that is misleading with respect to any material fact. Willfully violated the provisions of the Act. Been convicted of a misdemeanor involving any aspect of the securities business; or any felony; within the past 10 years. Been enjoined by any court from engaging in or continuing to conduct any aspect of the securities business. Been suspended or had its registration revoked by any State or the Securities and Exchange Commission within the past 10 years. Engaged in dishonest or unethical business practices. Been found to be insolvent, defined as not being able to meet obligations as they mature. Been found to be unqualified due to lack of training, experience, or knowledge of the securities business. However, lack of experience alone is not sufficient to deny registration. Has failed to reasonably supervise subordinates. This provision applies to broker-dealers and investment advisers. This does not apply to agents. The Administrator is permitted to, by order, summarily postpone or suspend registration, pending a final determination. If an order is entered, the Administrator must: Promptly notify the applicant, as well as the employer (if it is an agent or investment adviser representative application) that the order has been entered and why it has been entered; and Within 15 days of written request, the matter will be set down for a hearing. If no hearing is requested, the order stands until the Administrator decides that it should be changed 

Other Powers of the Administrator Administrator Can Conduct Investigations The Administrator has the power to conduct investigations for the purpose of determining if any person has violated, or is about to violate the Act. The Administrator has the power to conduct these investigations both in the State and outside the State. Therefore, the Administrator can start an investigation if he suspects, but does not have proof, that a violation exists. Public and Private Investigations Investigations can be public or private. When conducting a private investigation the Administrator does not give out any information about the investigation - either before, during or after. However, the Administrator can share information among its employees and officers during a private investigation. Administrator May Publish Information About Violations The Administrator can publish information concerning a violation, or concerning acts or practices that tend to operate as a fraud. Thus, the Administrator can "broadcast" to the world, any violations committed by a person, thus deterring any potential offenders. Administrator Can Subpoena Persons and Records The Administrator can subpoena persons to testify and to produce records for these investigations. If the subpoenas are not obeyed, the Administrator can enforce the subpoena by petitioning the appropriate court. These investigations can take place in the Administrator's State or in any other State. Administrator Can Compel Testimony That Incriminates The Administrator can compel any individual to testify, even if the testimony might tend to incriminate that person. (This is permitted as long as that state's law guarantees that the evidence cannot be used to prosecute that individual. Otherwise, the individual can use their 5th Amendment right against self-incrimination to not testify.) Administrator Can Issue a Cease and Desist Order Without Providing a Hearing Without providing the opportunity for a hearing, the Administrator can take the following remedies against any person that is about to violate, or who has violated the Act: Issue a "cease and desist" order against any such person; Bring action in a court of law to enjoin the acts or practices that violate the law. 

Upon the court granting a permanent or temporary injunction, restraining order, or writ of mandamus (which is a writ of prohibition), a receiver or conservator may be appointed for the defendant or the defendant's assets. The court may enter an order of rescission, restitution, or disgorgement directed at any person that violated the Act. If Another State Proves a Violation, Then This State Can Take Action In addition, the law allows that if an Administrator in another State shows that a person has violated the Act, then the Administrator in this State can appoint a receiver or conservator for the defendant's assets located in this State; and can apply for any other relief that a State court considers to be just. Judicial Review of Orders Must Be Petitioned Within 60 Days If any person disagrees with a final order of the Administrator, they may obtain a review in the appropriate court. A written petition must be submitted to the court no later than 60 days after the entry of the order. 

Overview of the Act's Liability and Penalty Provisions

 The Uniform Securities Act provides for the following remedies for violations of the Act: Civil Liability: Generally, when a person violates the Act without intending to defraud or deceive, civil liability applies. In this case, the basic remedy is that the customer who lost money must be paid back, including interest. Criminal Liability and Criminal Penalties: Generally, when a person violates the Act intending to defraud or deceive, or if that person commits a serious felony, Criminal Liability and Criminal Penalties apply. In this case, the customer must be paid back, plus interest, and the person who violated the Act can be made to pay fines and/or go to jail. Please note that there is no such thing as "Civil Penalties" under the Act - there are only Criminal Penalties. File Lawsuit to Obtain Damages; Burden of Proof Is on Plaintiff Also note that to obtain these remedies (also called "damages"), a lawsuit must be filed in State court. The plaintiff (the person who is suing) can be a customer or it can be the State. As in any lawsuit, the burden of proof is on the plaintiff, not the defendant. 

Criminal Liabilities and Penalties under the Act 

Willful Violations Are Criminal, Willful Violations Are Felonies If a person willfully violates the Act, such action is considered to be fraudulent and is classified as a felony under the Act. Under the Act, if a person willfully violates the Act, or has been shown to knowingly make a statement that is false or misleading in any material respect, he has committed a felony, punishable by: Restitution Making restitution to the injured party; $5,000 Fine A fine of $5,000 in most States (but the amount can vary from State to State); 3 Years Prison Imprisonment, for a period of up to 3 years (but this can vary from State to State). If the person(s) convicted of violating the law can prove that they did not have knowledge of the rule or order, then they cannot be imprisoned, but they still can be fined. 5 Year Statute of Limitations Proceedings seeking criminal penalties cannot start later than 5 years after the date of the alleged violation. Please note, however, that the State Administrator may vary this time period. 

Civil Liabilities under the Act 

Unknowing Violations Are Civil If a person violates the Act without willful intent, no fraud is involved. In this case, the transaction is considered to be "null and void" and civil liabilities apply. The basic idea behind civil liabilities is that the buyer can get a refund of his money. Liability Where a Person Still Owns That Security If a person sells securities or advisory services that result in violations of the Act, they are liable to all purchasers of the security or advisory services. That person must: Buy Back Security Upon Tender; Refund Investment Losses and Advisory Fees Upon tender of the security by the purchaser, buy back that security at the original price; or in the case of purchased advisory services, pay back the customer any monies that were lost from the amount invested plus all fees paid; Pay Legal 6% Rate of Interest, Net of Any Income Received Pay interest on the monies invested at the legal rate in the State, computed from the date of payment (most States use a 6% interest rate), net of any income received from the investment; and Pay Legal Fees Pay any attorney's fees of the purchaser. Liability Where a Person No Longer Owns That Security Damages are also available to any person that has bought that security, but no longer owns it. In this case, the person may recover the difference between the original price paid and the price at which the security was disposed of, plus interest paid at the legal rate, plus attorney's fees, minus any income received from the security. Also note that if an individual bought a number of securities that were sold in violation of the Act, some of which have appreciated in value, this individual may still retain the profitable investments, and only tender the unprofitable investments back to the seller for a refund. Civil Suit Survives Death of Plaintiff or Defendant If the plaintiff or defendant in a civil suit dies prior to resolution of the claim, the cause of action under the statute survives - meaning that the lawsuit continues until a resolution is reached either in court or by settlement. Transactions Where Civil Liability Applies Civil liabilities apply for the following violations: Failing to be registered as an agent or broker-dealer. Selling unregistered securities in non-exempt transactions. Participating in a transaction that manipulates that market, where the price of the security is affected by these actions (please note that this provision does not 

apply to Exchange listed or Nasdaq securities). Failing to give a customer a prospectus where required by the Administrator. Failing to file sales literature and advertising with the Administrator as required. Misrepresenting the status of an agent's or a security's registration (for example, saying that registration means it is "approved" is a misrepresentation). Making unintentional false statements or unintentionally omitting material facts when offering or selling a security. Liability for Civil Damages Can Also Apply to Controlling Persons Please note that other actions can also result in civil liability. In addition, civil liability not only applies to the person that committed the offense, but also to "controlling persons," who in the exercise of reasonable care, should have known about the violation. For example, if a registered agent commits an offense, and his broker-dealer, in the exercise of reasonable care, should have known about this action, then the broker-dealer can be held liable. No Civil Penalties Please note that civil liability under this portion of the law does not result in the imposition of civil penalties. Instead, the seller is obligated to buy back the security, plus interest, attorney's fees and court costs (less any income received from that security). Civil Suits Brought Within 3 Years but No Later Than 2 Years After Discovery There is a statute of limitations for filing civil suits, after which the court will not accept the suit. Any civil suits must be brought no later than 3 years after the contract of sale was executed; such suits cannot be brought later than 2 years after the discovery of the facts constituting the violation. 

Offers of Rescission Seller Can Offer to Buy Back Issue Found to Be Illegally Offered If a seller discovers that he illegally offered securities in the State, he may offer to repurchase the securities from the buyer under the conditions stipulated in the previous section (remember, these conditions are the buyer's right). This is known as an "Offer of Rescission." This offer must be made prior to the buyer's instituting suit. The seller must give the purchaser a written offer that includes the following: A statement of how liability may have arisen, and which fairly advises the purchaser of his rights of rescission; If the offer is being made because a material misstatement or omission of material fact was made in connection with an offering, any information necessary to correct the error must be furnished to the purchaser; An offer to repurchase the securities for cash, payable upon delivery, computed in the same manner as shown in the prior section; A statement that the offer must be accepted within 30 days in writing, or any shorter period specified by the Administrator. These amounts are due the buyer if the offer of the securities is legally rescinded. If the buyer exercises his right of rescission on such an illegal offer, the seller must pay these amounts to the buyer. No Suits Allowed if Rescission Right Not Exercised Within 30 Days of Written Notice No suit can be brought if the seller offered in writing to buy back the securities at the terms outlined above and the buyer failed to accept the offer within 30 days. If the buyer does not accept the rescission offer, the buyer remains the "happy" owner of the securities. 

Scope of the Act

 Administrator Has Power to Change Act's Provisions The Administrator is empowered to amend or rescind any rule under the Uniform Securities Act as they deem necessary to carry out the provisions of the Act. The only portion of the Act that the Administrator cannot change is the definition of exempt securities (such as US Governments, Municipals, etc.). Administrator Has Broad Jurisdiction The Act gives the Administrator jurisdiction where: Either the agent or the client resides in the State; The transaction occurred in the State; An offer is directed from the State; An offer is directed into the State; An offer is accepted in the State. This gives the Act a very broad scope since it applies to offers that come into the State from anywhere; or offers that go out of the State to anywhere. An offer may be made verbally or in writing. The following situations cover interpretations of these rules. BD in State A Offers Securities to a Customer in State B - Both States A and B Have Jurisdiction A Broker-Dealer (BD) located in State A makes an offer of securities to a customer located in State B. The Administrators of both States A and State B have jurisdiction and the BD must be registered in both States A and B. BD in State A Offers Securities to a Customer Located in State B Who Is Temporarily on Vacation in State C - Only States A and B Have Jurisdiction A BD located in State A has a customer who resides in State B. The BD makes an offer of securities to the customer when she is temporarily on vacation in State C. In this case, only the Administrators of States A and B have jurisdiction and the BD must only be registered in States A and B. The Act provides that broker-dealers who make offers of securities to existing (not new) customers who are vacationing in other States are not required to be registered in the State where the customer is vacationing. BD Located in State A Offers Securities to a Customer in State B, but the Mail Is Forwarded by the Post Office to State C, Where the Customer Is Temporarily Residing - Only State A Has Jurisdiction A broker-dealer located in State A mails an offer of securities to a customer in State B. The customer has moved temporarily to State C, and the post office forwards the customer's mail to the customer in State C. In this case, the Uniform Securities Act makes an exception. The broker-dealer must be 

registered in State A only. Because the offer was never received in State B, State B has no jurisdiction. One would think that because the offer was ultimately received in State C, that it would have jurisdiction, but this is not the case. The issue here is that the broker-dealer had no idea that the mail was forwarded to State C and should not be subject to the law of State C on this offer. The intent is to make sure that an innocent broker-dealer is not "entrapped" by a State and made subject to that State's law when an offer of securities is forwarded into that State by a third party without the brokerdealer's knowledge. Jurisdiction Over Offers Made in the Media Specific rules relating to the scope of the Act are: An offer made in a newspaper with a general, regular and paid circulation is not considered to be made in the State if: the newspaper is not published in the State; or if the newspaper is published in the State, but has more than 2/3 of its circulation outside the State, during the last 12 months. Any offer to sell which is made through radio, television or other electronic communication in another State, is not considered to be an offer made in this State. Offers Made via the Internet The use of the internet by Broker-Dealers, representatives (BD Agents), Investment Advisers and investment adviser representatives (IA Agents) has created an issue for the State Administrators. The question raised with an advertisement placed on the internet, which can be accessed in any State, becomes: "Is the internet communication an offering of securities or advisory services in that State, hence registration is required?" NASAA has issued the following interpretation for broker-dealers (BDs), investment advisers (IAs) and their agents. Internet Communications by BDs, IAs and Their Agents An "Internet Communication" shall NOT be deemed to be "transacting business" in the State where the communication was received if: The communication is limited to general information on products and services and does not involve effecting securities transactions, attempting to effect securities transactions or the rendering of personalized investment advice for compensation; The communication contains a legend that the Broker-Dealer, Investment Adviser, BD Agent or IA Agent may only transact business in that State if first registered in that State; or if that "person" is excluded or exempted from registration; Any follow-up individualized responses to persons that involve effecting securities transactions or the attempt to effect securities transactions; or the rendering of investment advice for compensation; cannot be made unless that "person" has complied with the State's registration requirements (or is exempted or excluded); and The Internet Communication contains a "fire wall" or other procedure designed to ensure compliance with the above requirements. 

BD Agent/IA Agent Internet Communications For Internet Communications by BD Agents or IA Agents only, the communication shall NOT be deemed to be "transacting business" in the State where it was received if: The Internet Communication must prominently disclose the affiliation of the BD Agent or IA Agent with the Broker-Dealer or Investment Adviser; The Broker-Dealer or Investment Adviser retains responsibility for reviewing and approving the content of any Internet Communication by any Agent and authorizes the distribution of information on the particular products and services offered through the Internet Communication; and The Agent cannot exceed the scope of authority granted by the Broker-Dealer or Investment Adviser in the Internet Communication. 

Chapter 4 Summary Video and live tutoring replay with Richard

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