Chapter 3: Remedies and Administrative Provisions - B. Administrative Actions

Question 1

General Administrative Actions

Answer 1

The administrator has the power to initiate an investigation for the purpose of determining if a violation of the Uniform Securities Act (USA) has occurred or will occur. These investigations can be conducted in the administrator’s home state or any other state, and can be either public or private.

The administrator can subpoena persons to testify and produce documentation for these investigations. If the subpoena is ignored, the administrator can enforce the subpoena by petitioning the appropriate court. Failure to obey these orders is punishable as contempt.

Administrators can also compel any individual to testify,even though the testimony may incriminate the person. A person can always invoke the federal Fifth Amendment right against self-incrimination.

Failure to comply with an order of the Administrator is referred to as contumacy (contempt for the Administrator’s order).

Question 2

Administrative Actions - Prohibited Orders and Injunctions

Answer 2

If an administrator determines that a person has or is about to commit a violation of any provision of the Uniform Securities Act, the administrator can issue a cease and desist order against that person. If a cease and desist order is issued, the administrator must also provide for a hearing within 15 days of the request. Only if requested does the administrator have to provide an opportunity for a hearing. The administrator is further empowered to bring action in a court of jurisdiction to request a temporary or permanent injunction or restraining order.

It’s important to note that the administrator cannot issue the injunction; the order for the injunction must go through the court system.

Upon the granting of an injunction or restraining order, a receiver or conservator may be appointed for either the defendant or the defendant’s assets. Additionally, if an administrator in another state proves that a person has violated the Act, the administrator in the defendant’s state can appoint a receiver or conservator in that state for the defendant’s assets. The administrator can apply for any measure of relief that the state court considers to be just.

Any person in disagreement with the final order of the administrator can obtain a review in the appropriate court. Written petitions must be submitted within 60 days of the entry of the order.

Question 3

Administrative actions – civil liabilities

Answer 3

Civil liabilities are applicable for the following violations:

• Failing to hold proper registration as an agent or broker/dealer;
• Soliciting of unregistered, nonexempt securities;
• Willfully participating in transactions that manipulate the market and affect the price of security. (This provision does not apply to securities listed on a federal covered exchange or Nasdaq securities);
• Failing to provide a prospectus to a customer when required;
• Failing to file required advertising and sales literature with the administrator;
• Misrepresenting the status of an agent’s or a security’s registration as being approved; and
• Making unintentional false statements or omitting material facts while offering or selling a security. Intentional omissions constitute fraud and fall under the definition of criminal liabilities.

Question 4

Administrative actions – controlling persons

Answer 4

Civil liabilities apply not only to the person who committed the violation, but also to controlling persons. For example, if an agent commits a violation, and the agent’s broker/dealer should have been aware of the action, the broker/dealer can also be held liable under the USA provisions.

Question 5

Statute of limitations - Civil

Answer 5

For civil suit purposes under state law, any action must be taken within 3 years of the alleged violation, or 2 years of the discovery of the violation, whichever comes first. Any cause of action under the Uniform Securities Act (USA) survives the death of any plaintiff or defendant.

Question 6

No contractual waivers

Answer 6

Any condition or provision that binds a person who purchases or sells a security, or receives investment advice to waive compliance with the Uniform Securities Act (USA) or any of its rules, is void.

Question 7

Offers of Rescission

Answer 7

If a person realizes that they have effected an illegal securities transaction, the person can, under a letter of rescission, offer to buy back the security and refund any fees paid by the buyer. The offer of rescission must be made before the buyer initiates a suit. The following information must be delivered to the purchaser in the written rescission offer:

• An explanation of the liability and advice to the purchaser of the right of rescission;
• If the liability was caused by the omission of material information, the inclusion of such information to correct the error;
• An offer to repurchase the security for cash, less any money paid to the investor plus a stipulated interest rate; and
• A statement that the offer must be accepted within 30 days. A buyer’s failure to accept an offer of rescission within 30 days waives their right to bring an action at a later date.

The Securities Act of 1933 states that an investor may bring civil suits within 1 year of discovery of a violation or within 3 years of the date the violation occurred, whichever is earlier.