Administrative Remedies & Enforcement

Powers and Authority of the Administrator

The state securities Administrator serves as the chief enforcement officer under the Uniform Securities Act, wielding broad powers to protect investors and maintain market integrity. Understanding the scope and limits of the Administrator's authority is essential for Series 66 candidates, as these enforcement provisions are heavily tested and form the backbone of state securities regulation.

Under Section 401 of the USA, the Administrator has comprehensive authority to administer and enforce the Act within the state. This includes rulemaking, investigative, and enforcement powers. The Administrator's actions are subject to judicial review, ensuring proper checks and balances on regulatory authority.

Investigative and Examination Powers

The Administrator may conduct investigations within or outside the state to determine whether any person has violated, is violating, or is about to violate the Act. This investigative authority is proactive — the Administrator need not wait for a formal complaint before initiating an investigation.

Key investigative powers include:

• Issuing subpoenas: The Administrator can compel the production of books, records, documents, correspondence, and other materials relevant to an investigation. Subpoenas can be issued to persons within or outside the state.
• Compelling testimony: The Administrator can require any person to appear and testify under oath regarding matters under investigation. Testimony can be taken within or outside state boundaries.
• Conducting examinations: The Administrator may examine the books and records of any registered broker-dealer, agent, investment adviser, or IAR at any time, without advance notice. Routine compliance examinations are common.
• Publishing information: The Administrator may publish information concerning violations when doing so is in the public interest and does not prejudice the rights of persons under investigation.

Rulemaking Authority

Under Section 412 of the USA, the Administrator has authority to make, amend, and rescind rules, forms, and orders necessary to carry out the Act's provisions. These rules have the force of law within the state and supplement the statutory provisions with detailed regulatory requirements.

The Administrator's rules must be adopted through proper administrative procedures (notice, comment period, publication) and cannot exceed the statutory authority granted by the Act. NASAA (North American Securities Administrators Association) provides model rules that many states adopt to promote uniformity across jurisdictions.

Cooperation with Other Regulators

The Administrator may cooperate with securities administrators in other states, the SEC, FINRA, and other regulatory bodies. This includes sharing investigative information, coordinating enforcement actions, and providing reciprocal assistance in serving subpoenas or enforcing orders. Multi-state coordination is essential for combating securities fraud that crosses jurisdictional boundaries.

Registration Actions and Administrative Orders

The Administrator has several tools available to address violations and protect investors. These administrative actions can affect registrations, impose conditions, and halt unlawful conduct. Understanding the distinctions between different types of actions is critical for exam success.

Five Types of Registration Actions

Under Section 204 (securities registration) and Section 412 (person registration), the Administrator may take five distinct actions on registrations:

1. Deny: Refuse to grant a registration application. Denial occurs before the registration becomes effective. The Administrator denies registration when the applicant fails to meet statutory requirements or has a disqualifying condition (felony conviction within 10 years, material misstatement in application, insolvency for broker-dealers, lack of qualifications, etc.).
2. Revoke: Permanently terminate an existing registration. Revocation is the most severe administrative sanction and is appropriate for serious violations such as fraud, repeated violations, failure to supervise, or willful violation of the Act. A revoked registrant must reapply and may face additional conditions or permanent bars.
3. Suspend: Temporarily halt a registration for a specified period (e.g., 30 days, 90 days, one year). Suspension is appropriate for less severe violations or when the registrant can correct the deficiency. Suspension allows for eventual reinstatement without a new application.
4. Cancel: Remove a registration for non-punitive, administrative reasons. Cancellation applies when the registrant cannot be located, has died, has become mentally incompetent, has ceased to exist (for entities), or no longer conducts business. Cancellation is not a penalty and does not require notice and hearing.
5. Withdraw: The registrant voluntarily terminates their own registration. Withdrawal becomes effective 30 days after filing the application for withdrawal, unless the Administrator institutes a proceeding before that date. This prevents registrants from withdrawing to avoid pending enforcement actions.

Prior Notice and Opportunity for Hearing

For punitive actions (denial, suspension, revocation), the Administrator must generally provide prior notice and opportunity for a hearing under Section 412(d) of the USA. This satisfies due process requirements and allows the affected person to present their defense before sanctions are imposed.

However, the Administrator may issue a summary order (effective immediately, without prior notice or hearing) when:

• The Administrator finds that the public interest requires immediate action, AND
• The Administrator finds that the delay caused by a hearing would be harmful to investors

Even with a summary order, the Administrator must promptly notify the affected person and provide an opportunity for a hearing after the order takes effect. Summary orders allow the Administrator to act quickly against ongoing fraud or imminent harm while still preserving hearing rights.

Cease and Desist Orders

Under Section 412(d) of the USA, the Administrator has the power to issue cease and desist orders to any person engaging in conduct that violates the Act. A cease and desist order immediately prohibits the specified conduct and is one of the Administrator's most powerful enforcement tools.

When Cease and Desist Orders Are Used

The Administrator may issue cease and desist orders to:

• Stop ongoing violations (selling unregistered securities, operating without registration, making fraudulent statements)
• Prevent imminent violations (when the Administrator has evidence that a person is about to engage in a violation)
• Halt unlawful business practices (churning, unauthorized trading, misleading advertising)
• Protect investors from immediate and ongoing harm

Cease and desist orders can be directed at any person, not just registered persons. This allows the Administrator to act against unregistered individuals or entities engaging in securities activities within the state.

Summary vs. Post-Hearing Orders

The Administrator may issue a cease and desist order in two ways:

1. After notice and hearing: The Administrator provides the respondent with notice, conducts a hearing, and issues the order based on findings. This is the standard process.
2. On a summary basis (temporary order): When immediate action is necessary to protect the public interest, the Administrator may issue a temporary cease and desist order without prior notice or hearing. The order takes effect immediately, but the Administrator must promptly schedule a hearing to determine whether the order should be made permanent.

Distinction from Injunctions

A cease and desist order is different from an injunction. The Administrator can issue cease and desist orders directly using administrative authority. An injunction is a court order, and the Administrator must petition a court under Section 408 to obtain injunctive relief. Both serve to halt violations, but injunctions carry the full contempt power of the court.

If a person violates a cease and desist order, the Administrator may seek court enforcement, which can result in fines, contempt charges, and imprisonment (by the court, not the Administrator).

Administrative Sanctions and Penalties

Beyond registration actions and cease and desist orders, the Administrator may impose various sanctions and conditions to address violations and deter future misconduct. These remedies are available under Section 412 of the USA.

Monetary Penalties and Disgorgement

The Administrator may assess administrative fines for violations of the Act. While specific fine amounts vary by state, many states following NASAA guidelines authorize fines of up to $10,000 per violation. Some states have significantly higher limits, particularly for egregious or repeated violations.

The Administrator may also order disgorgement of profits obtained through violations. Disgorgement requires the violator to return ill-gotten gains, preventing unjust enrichment. This remedy is particularly effective against schemes where the violator profited substantially from illegal conduct.

Conditions and Limitations

Rather than denying or revoking a registration outright, the Administrator may impose conditions or limitations on registration, including:

• Restrictions on the types of securities that may be offered or sold
• Requirements for additional supervision or compliance procedures
• Limitations on compensation arrangements
• Periodic reporting requirements
• Mandatory training or continuing education
• Prohibition from supervising other agents or representatives

These conditions allow the Administrator to tailor remedies to specific violations and registrants, providing flexibility between outright denial or revocation and allowing continued registration with safeguards.

Stop Orders on Securities Registrations

Under Section 306, the Administrator may issue a stop order suspending or denying effectiveness of a securities registration statement. Stop orders prevent the sale of securities when the registration contains material misstatements, omissions, or when the offering would constitute fraud.

The Administrator may issue stop orders before or after the registration becomes effective. Like other administrative actions, stop orders generally require prior notice and hearing unless summary action is necessary for immediate investor protection.

Civil Liability and Private Rights of Action

The USA creates private civil remedies that allow injured investors to sue for violations and recover their losses. These provisions, found in Section 410 (civil liability for unregistered sales) and Section 509 (civil liability for fraud), are among the most important investor protections in the Act.

Civil Liability for Registration Violations

Under Section 410(a), any person who offers or sells a security in violation of the registration requirements is liable to the purchaser. This applies to selling unregistered, non-exempt securities or selling without proper person registration (unlicensed broker-dealer or agent).

The buyer may recover:

• The consideration paid for the security
• Plus interest from the date of purchase (typically 6% per annum, though state-specific rates vary)
• Minus any income received on the security (dividends, interest)
• Minus the current value (if the buyer still owns the security)

If the buyer no longer owns the security, recovery is the purchase price minus the sale price, plus interest. This is the remedy of rescission — the buyer can essentially "undo" the transaction and recover their investment.

Civil Liability for Fraud

Under Section 410(a)(2), any person who offers or sells a security by means of an untrue statement of material fact or an omission of material fact is liable to the purchaser. This civil fraud remedy parallels the criminal and administrative fraud provisions but provides direct recovery for the injured investor.

Critically, the burden of proof is shifted in fraud cases: 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 makes it easier for investors to prevail in civil fraud actions.

Statute of Limitations for Civil Actions

Civil actions under the USA must be commenced within the earlier of:

• 2 years after discovery of the violation (or when it should have been discovered with reasonable diligence), OR
• 3 years after the sale

The "earlier of" standard means that the 3-year limit is absolute. Even if the investor discovers the fraud 2.5 years after the sale, they only have 6 months remaining (to reach the 3-year outer limit) to file suit, not a full 2 years from discovery.

Tender Offer and Rescission Rights

Under Section 410(b), if the seller makes a tender offer to the buyer (offering to repurchase the security at the original purchase price plus interest), and the buyer refuses the offer, the buyer waives the right to sue for rescission. This encourages voluntary resolution of disputes without litigation.

However, the tender offer must be made in good faith and must include the statutory interest. If the offer is insufficient or not made in good faith, the buyer retains the right to sue.

Joint and Several Liability

Multiple persons involved in a violative transaction may be held jointly and severally liable. This means the injured investor can recover the full amount from any one defendant, and that defendant may then seek contribution from other responsible parties. Joint and several liability is particularly important in underwriting and distribution chains where multiple parties participate in an unlawful sale.

Criminal Penalties and Judicial Review

While administrative and civil remedies address most violations, the USA also provides for criminal prosecution of willful violations. Criminal penalties represent the most severe consequences under state securities law.

Criminal Violations and Penalties

Under Section 508 of the USA, any person who willfully violates any provision of the Act, any rule or order under the Act, or who willfully makes a false statement in a filing is guilty of a criminal offense. The key element is willfulness — the person must have acted intentionally or with reckless disregard, not merely negligently.

Criminal penalties under the USA typically include:

• Imprisonment: Up to 3 years (in some states, up to 5 years for aggravated offenses)
• Fines: Up to $5,000 per violation (some states have higher limits, such as $10,000 or more)
• Both: The court may impose both imprisonment and fines for the same violation

Note that specific penalty amounts vary by state, but the NASAA model is generally 3 years imprisonment and $5,000 fines. The Series 66 exam tests the model statute provisions.

Who Can Bring Criminal Charges?

Criminal prosecutions are brought by the state's prosecuting authority (typically the state attorney general or district attorney), NOT by the Administrator. The Administrator's role is to investigate violations, refer cases to prosecutors, and provide evidence and cooperation during the prosecution.

The Administrator cannot impose criminal penalties directly. Only a court, following prosecution by the appropriate criminal authority, can impose imprisonment or criminal fines.

Criminal Statute of Limitations

Criminal prosecutions 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 extensive investigation and have a higher burden of proof (beyond a reasonable doubt).

Parallel Proceedings

A single violation can result in administrative, civil, and criminal proceedings simultaneously. These proceedings are independent:

• The Administrator can revoke a registration and impose fines (administrative)
• The injured investor can sue for rescission and damages (civil)
• The state attorney general can prosecute criminally (criminal)

The outcomes are independent. Acquittal in a criminal case (failure to prove guilt beyond a reasonable doubt) does not prevent the Administrator from revoking a registration (preponderance of evidence standard) or the investor from recovering in a civil lawsuit (preponderance standard, with burden shifted to seller in fraud cases).

Judicial Review of Administrator Orders

Under Section 410 of the USA, any person aggrieved by an order of the Administrator has the right to seek judicial review in the appropriate state court. This right ensures that the Administrator's decisions are subject to independent oversight.

Key aspects of judicial review:

• Timing: The petition for review must be filed within a specified period (typically 60 days) after the Administrator's order is entered.
• Venue: Review is typically sought in the state court located in the county where the Administrator's office is located or where the petitioner resides.
• Standard of review: The court reviews whether the Administrator's order is supported by substantial evidence and whether the Administrator acted within statutory authority. The court gives deference to the Administrator's factual findings but reviews legal conclusions independently.
• No automatic stay: Filing a petition for judicial review does NOT automatically suspend the Administrator's order. The order remains in effect unless the court specifically grants a stay pending review.