Administrative Provisions & Remedies

Powers of the Administrator

The state securities Administrator is the primary enforcement authority under the Uniform Securities Act. As we discussed in Chapter 1, the Administrator has broad powers to protect investors and maintain the integrity of the securities markets. This chapter examines those powers in greater detail, focusing on the specific enforcement tools available and the procedural safeguards that protect the rights of persons subject to administrative action.

Rulemaking Authority

The Administrator has the power to make, amend, and rescind rules, forms, and orders necessary to carry out the provisions of the Act. These rules have the force and effect of law within the state. The rulemaking authority is essential because the securities industry is constantly evolving, and the Administrator needs the flexibility to address new types of securities, new business practices, and new forms of fraud without waiting for the legislature to amend the statute.

Rules adopted by the Administrator must be consistent with the Act and must be adopted through proper administrative procedures, which typically include public notice, an opportunity for comment, and publication of the final rule. The Administrator cannot adopt rules that conflict with or exceed the authority granted by the statute.

Investigative Authority

The Administrator may conduct investigations within or outside the state as necessary to determine whether any person has violated, is violating, or is about to violate any provision of the Act or any rule or order issued under the Act. The investigative authority is broad and proactive: the Administrator does not need to wait for a complaint before initiating an investigation.

In connection with investigations, the Administrator has the power to:

• Issue subpoenas: The Administrator can compel the production of documents, records, and other tangible evidence relevant to the investigation. This includes account records, correspondence, financial statements, and any other business records of the person under investigation.
• Compel testimony: The Administrator can require any person to appear and testify under oath about any matter under investigation. The testimony can be taken within or outside the state.
• Examine books and records: The Administrator can examine the books, records, and accounts of any registered person (broker-dealer, agent, investment adviser, or IAR) at any time, without advance notice. This includes routine compliance examinations as well as examinations triggered by suspected violations.
• Publish information: The Administrator may publish information about violations or potential violations for the protection of investors, provided that doing so does not prejudice ongoing investigations or proceedings.

Cooperation with Other Regulators

The Administrator may cooperate with securities administrators of other states, the SEC, FINRA, and other regulatory bodies in conducting investigations and sharing information. This cooperative framework is essential for addressing multi-state fraud schemes and ensuring consistent enforcement across jurisdictions.

The Administrator may also participate in coordinated enforcement actions with other regulators, share confidential information on a reciprocal basis, and seek or provide assistance in serving subpoenas or enforcing orders across state lines.

Enforcement Actions

The Administrator has several enforcement tools available to address violations of the Act. These tools range from relatively minor administrative actions to severe sanctions that can effectively end a person's career in the securities industry.

Deny, Revoke, Suspend, Cancel, and Withdraw

The Administrator can take action against registrations in five distinct ways, each with a specific meaning and application:

1. Deny: The Administrator refuses to grant a registration that has been applied for. Denial occurs before the registration becomes effective. It is appropriate when the applicant fails to meet the initial requirements for registration or is subject to disqualifying conditions (felony conviction, regulatory bar, insolvency, etc.).
2. Revoke: The Administrator permanently terminates an existing registration. Revocation is the most severe administrative sanction and is typically reserved for serious violations. Once revoked, the person must reapply for registration and may be subject to additional conditions.
3. Suspend: The Administrator temporarily halts an existing registration for a specified period. Suspension may be appropriate when the violation is less severe or when the Administrator wants to preserve the option of reinstatement after the person has corrected the underlying issue.
4. Cancel: The Administrator removes a registration when the registrant can no longer be located, has become mentally incompetent, is deceased, is no longer in existence (for entities), or has been adjudicated as not being of sound mind. Cancellation is not punitive; it is administrative housekeeping to remove registrations that are no longer valid.
5. Withdraw: The registrant voluntarily terminates its own registration. Withdrawal becomes effective 30 days after the application for withdrawal is filed, unless the Administrator institutes a proceeding against the registrant before that date. This ensures that a person cannot withdraw to avoid an impending enforcement action.

Notice and Opportunity for Hearing

A fundamental requirement of due process is that the Administrator must generally provide prior notice and an opportunity for a hearing before denying, revoking, or suspending a registration. This means the person affected has the right to know the charges against them and to present their defense before the Administrator takes action.

However, there is an important exception: the Administrator may issue a summary order (taking effect immediately, without prior notice or hearing) if the Administrator finds that the public interest requires immediate action and that the delay inherent in a normal hearing process would be harmful to investors. Even in the case of a summary order, the Administrator must promptly notify the affected person and provide an opportunity for a hearing after the order takes effect.

The summary order power is significant because it allows the Administrator to act quickly to stop ongoing fraud or other imminent harm. Without this power, a fraudster could continue to victimize investors during the weeks or months it might take to complete a formal hearing process.

Cease and Desist Orders

The Administrator may issue a cease and desist order directing any person to stop engaging in an act or practice that violates the Act. A cease and desist order is a powerful enforcement tool because it immediately prohibits the person from continuing the specified conduct.

How Cease and Desist Orders Work

The Administrator can issue a cease and desist order:

• After notice and hearing: The Administrator provides notice to the respondent, conducts a hearing, and issues the order based on the findings.
• On a summary basis (temporary order): If the Administrator determines that the violation is ongoing and investor harm is imminent, the Administrator can issue a temporary cease and desist order without prior notice or hearing. The order takes effect immediately but must be followed by a prompt hearing to determine whether the order should be made permanent.

A cease and desist order is different from an injunction. An injunction is a court order; a cease and desist is an administrative order. The Administrator can issue cease and desist orders on their own authority. However, if the person violates a cease and desist order, the Administrator may need to seek court enforcement (including a contempt order) to compel compliance.

Civil Liability

The USA creates private rights of action that allow injured investors to sue securities professionals for violations of the Act. These civil liability provisions are among the most important investor protection mechanisms in the Act because they give investors the ability to recover their losses directly.

Civil Liability for Selling Unregistered Securities or Unlicensed Activity

A person who offers or sells a security in violation of the registration provisions (selling an unregistered, non-exempt security or selling while not properly registered) is liable to the purchaser. The buyer can sue to recover:

• The consideration paid for the security, plus interest at a rate determined by the Administrator (typically 6% per year from the date of purchase), minus any income received on the security
• Alternatively, if the buyer no longer owns the security, the buyer can recover damages equal to the purchase price minus the sale price, plus interest

This remedy is often described as "rescission" — the buyer can essentially "undo" the transaction and get their money back. The buyer does not need to prove that the seller intended to defraud; the mere fact that the security was sold in violation of the registration requirements is sufficient.

Civil Liability for Fraud

A person who offers or sells a security by means of fraud (material misrepresentations or omissions) is liable to the purchaser under similar terms. The buyer can recover the purchase price plus interest minus income, or damages if the security has been sold.

In a fraud action, the burden of proof is shifted: the seller has the burden of proving that they did NOT know, and in the exercise of reasonable care could not have known, of the misrepresentation or omission. This "shifting of the burden" significantly favors the investor and is a key feature of state securities law.

Statute of Limitations

Civil actions under the USA are subject to specific time limits (statutes of limitations):

• An action must be commenced within the earlier of:
  • 2 years after the discovery of the violation (or the time when it should have been discovered through the exercise of reasonable diligence), OR
  • 3 years after the sale of the security

This means that no matter when the investor discovers the violation, the absolute deadline for filing suit is 3 years after the sale. If the investor discovers the violation within 3 years of the sale, they have 2 years from the discovery date (but still cannot exceed the 3-year outer limit).

Rescission Rights

The right of rescission allows a buyer to tender back the security (return it to the seller) and receive a refund of the purchase price plus interest. This right exists when the security was sold in violation of the registration provisions or through fraud.

If the seller offers to buy back the security at the purchase price plus interest before the buyer files suit, and the buyer rejects the offer, the buyer loses the right to sue for rescission (though the buyer may still have other legal remedies). This provision encourages voluntary resolution of disputes and reduces litigation.

Criminal Penalties

The USA provides for criminal penalties for willful violations of the Act. Criminal prosecution is the most serious consequence of violating state securities laws and can result in both imprisonment and substantial fines.

What Constitutes a Criminal Violation?

A person may be criminally liable under the USA for willfully violating any provision of the Act, willfully violating any rule or order of the Administrator, or willfully making a false filing with the Administrator. The key word is "willfully" — the prosecution must prove that the person acted intentionally, not merely negligently. Inadvertent mistakes or good-faith errors generally do not constitute criminal violations.

Penalties

Criminal penalties under the USA may include:

• Imprisonment: A person convicted of a willful violation of the Act may be imprisoned for up to 3 years (in some states, this may vary).
• Fines: Criminal fines of up to $5,000 per violation (again, this may vary by state). Some states have significantly higher fine limits.
• Both: A court may impose both imprisonment and a fine for the same violation.

Statute of Limitations for Criminal Actions

Criminal prosecutions under the USA must generally be commenced within 5 years after the offense was committed. This is longer than the civil statute of limitations (2/3 years) because criminal cases often require more time to investigate and prosecute.

Who Can Bring Criminal Charges?

Criminal prosecutions are brought by the state's appropriate prosecuting authority (typically the attorney general or district attorney), NOT by the Administrator. The Administrator's role is to investigate, refer the matter to the prosecutor, and cooperate in the prosecution. The Administrator does not have the power to bring criminal charges or impose criminal penalties directly.

Judicial Review of Administrator Decisions

Any person aggrieved by an order of the Administrator has the right to seek judicial review in a court of competent jurisdiction. This right is a fundamental safeguard of due process, ensuring that the Administrator's powers are subject to independent oversight.

How Judicial Review Works

The process for obtaining judicial review typically involves the following steps:

1. Filing a petition: The aggrieved person files a petition for review with the appropriate court (usually the state court in the county where the Administrator's office is located). The petition must be filed within a specified period after the Administrator's order is issued (typically 60 days, though this varies by state).
2. Record on review: The court reviews the administrative record, which includes the transcript of the hearing, the evidence presented, and the Administrator's findings and conclusions. The court generally does not conduct a new hearing or receive new evidence.
3. Standard of review: The court determines whether the Administrator's order is supported by substantial evidence, is consistent with the law, and was not arbitrary, capricious, or an abuse of discretion. The court gives deference to the Administrator's factual findings but reviews legal conclusions independently.
4. Court's decision: The court may affirm the Administrator's order, reverse it, or remand it to the Administrator for further proceedings. If the court finds that the order was not supported by the evidence or was legally improper, it can set the order aside.

Stays Pending Review

Filing a petition for judicial review does not automatically stay (suspend) the Administrator's order. The order remains in effect unless the court specifically grants a stay. To obtain a stay, the petitioner must demonstrate that irreparable harm would result from enforcement of the order during the pendency of the review and that a stay would not be against the public interest.