Study guide
This chapter covers the fifth topic of the official NASAA outline: the enforcement machinery behind the act. It covers the Administrator's investigative and disciplinary powers, and the civil, criminal, and administrative consequences of violating the act, including appeal rights.
The Administrator's Authority
The Administrator is the state official who enforces the act, and their jurisdiction reaches any offer or sale that originated in the state, was directed into the state, or was accepted in the state, which means two or even three Administrators can share jurisdiction over one transaction. A safe harbor keeps mass media out of this net: an offer is not made in the state merely because it appears in a television or radio broadcast originating outside the state, or in a newspaper published outside the state, or published inside the state but with more than two-thirds of its circulation outside it. The Administrator's tools are broad. They may make, amend, and rescind rules and orders; conduct investigations inside or outside the state, publicly or privately, even before any violation occurs; subpoena witnesses and records and compel testimony (a witness cannot refuse on self-incrimination grounds once given use immunity, but compelled testimony cannot then be used criminally against them); issue cease and desist orders, with or without a prior hearing, to stop conduct; seek injunctions from a court; and deny, suspend, or revoke registrations of persons and securities, including stop orders against securities registrations. Disciplinary orders require statutory grounds plus a finding that the action is in the public interest, and the target is entitled to prior notice, opportunity for a hearing, and written findings. A summary order may suspend a registration immediately pending final determination, but the Administrator must promptly notify the affected person of the order and its reasons, and if the person files a written request, the matter must be set down for a hearing within 15 days after the Administrator receives that request. Distinguish revocation from cancellation: cancellation is non-punitive housekeeping when a registrant dies, dissolves, is declared mentally incompetent, or cannot be located.
Remedies, Penalties, and Appeals
Violations expose a seller to three layers of consequences. Civil liability lets a buyer who was sold a security in violation of the act, through unregistered sales or material misstatements, sue to rescind the transaction. The recovery formula is the consideration paid, plus interest from the date of payment (the model act uses six percent per year, though states may set their own rate), plus costs and reasonable attorney's fees, minus any income received on the security. If the buyer no longer owns the security, damages substitute for rescission. The statute of limitations as tested is the earlier of two years after discovery of the violation or three years after the sale. A seller who discovers its own violation can cut off liability with a rescission offer: a written offer to repurchase at the original price plus interest, less income received. A buyer who fails to accept within 30 days of receiving the offer loses the right to sue on that transaction. Criminal penalties require willful violations and carry, under the model act, a fine of up to 5,000 dollars, imprisonment up to three years, or both; no one may be imprisoned for violating a rule or order they can prove they had no knowledge of. Administrators do not send anyone to prison; they refer cases to prosecutors. Finally, any person aggrieved by an Administrator's order may appeal by filing a petition in the appropriate court within 60 days of the order, and filing the appeal does not automatically stay the order, which remains in effect unless the court says otherwise. Officers, directors, partners, and supervising employees can share liability with the firm unless they prove they did not and could not reasonably have known of the violation.
Key terms
- Cease and desist order
- — An Administrator's directive to stop a practice, issuable with or without a prior hearing; enforcement of noncompliance requires a court injunction.
- Stop order
- — An Administrator's order denying, suspending, or revoking the effectiveness of a securities registration.
- Summary order
- — An order suspending a registration immediately pending final determination; the affected person may demand a hearing, which must be set within 15 days of the request.
- Rescission
- — The civil remedy returning the buyer's consideration plus interest, costs, and attorney's fees, less income received; a 30-day letter of rescission can foreclose suit.
- Cancellation
- — Non-punitive termination of a registration due to death, dissolution, mental incompetence, or the registrant ceasing business or being unlocatable.
- Use immunity
- — Protection preventing compelled testimony from being used criminally against the witness, which removes the basis for refusing to testify on self-incrimination grounds.
Exam tips
- Memorize the enforcement numbers as a set: 5,000 dollar fine and 3 years for criminal violations, 2 years from discovery or 3 years from sale for civil suits, 30 days to accept rescission, 60 days to appeal an order, and an appeal does not stay the order.
- Cancellation versus revocation is a classic trap: death, dissolution, or mental incompetence leads to cancellation (no wrongdoing), while violations lead to denial, suspension, or revocation.
- A summary suspension can take effect immediately, but the affected person's written request for a hearing forces the Administrator to schedule one within 15 days.
- Jurisdiction can be shared: an offer that originates in one state and is directed into another can draw enforcement action from both Administrators.