Authority of the State Securities Administrator

The state securities administrator is the chief securities regulator in each state. The administrator enforces all provisions of the Uniform Securities Act (USA) within the state. Core authorities include the denial/suspension/revocation grounds for person registrations, the stop-order authority for securities registrations, jurisdiction over offers and sales of securities, and the procedures for administrative actions and judicial review.

• The Administrator does not have the power to:
  • Grant injunctions (only courts can do this)
  • Issue jail sentences (only courts via criminal prosecution)
  • Make judicial determinations of fraud
• The Administrator cannot use non-public information filed with the office for personal benefit

When Does the Administrator Have Jurisdiction Over an Offer or Sale?

The Administrator has jurisdiction over an offer or sale of a security if the offer:

• Originated in the state, OR
• Was directed to a person in the state, OR
• Was accepted in the state

Any one of those three contacts is enough. A single transaction can fall within the jurisdiction of multiple states at the same time when the agent calls from one state, the prospect is in a second state, and the acceptance happens in a third.

Exam Tip: Gotchas

• Origin, directed to, and accepted in are three independent jurisdictional bases. The exam often presents a multi-state scenario (call from State A, prospect in State B, acceptance in State C) where all three states have jurisdiction.
• Residency alone is not the test. A state has jurisdiction because an offer was directed to a person physically located there, not merely because that person lives in the state.

What Investigative Powers Does the Administrator Have?

The administrator may conduct public or private investigations within or outside the state whenever it appears necessary to determine whether any person has violated, is violating, or is about to violate the USA. The Administrator has broad discretion to investigate: no public complaint, court approval, or prior notice to the investigated person is required to open an investigation.

• May require persons to file written statements under oath
• May publish information about violations
• May administer oaths and affirmations
• May subpoena witnesses, compel attendance, take evidence, and require production of documents
• May examine the books and records of any registered person at any time
• Contumacy (the noun) describes the act of being contumacious (the adjective) toward a subpoena: a person is contumacious when they are willfully disobedient and refuse to obey a subpoena. The Administrator petitions the court; non-compliance = contempt of court
• May issue subpoenas at the request of another state's securities administrator when the alleged conduct would violate the assisting state's law if it occurred there. If the person refuses to comply, the Administrator must apply to a court for enforcement, just as with a subpoena for the Administrator's own investigation
• Interstate cooperation: coordinates and shares information across jurisdictions with other state administrators, the SEC, FINRA, the CFTC, and banking regulators

What Happens When a Witness Is Compelled to Testify?

• No person may refuse to testify or produce records on the ground that doing so might tend to incriminate them: a witness cannot invoke the Fifth Amendment to stay silent before the Administrator
• That does not erase the constitutional protection, it trades it for something else. If the person claims the privilege against self-incrimination and is then compelled to testify, no state prosecution or penalty may follow for or on account of any transaction, matter, or thing the testimony concerned
• Exception: the witness can still be prosecuted for perjury or contempt committed while testifying

Exam Tip: Gotchas

• This does not conflict with the Fifth Amendment. Compelling testimony while guaranteeing immunity from prosecution over that same matter satisfies the privilege against self-incrimination. The witness loses the right to stay silent; in exchange, the state guarantees the testimony (and the matter it concerns) cannot be used to prosecute them.
• The immunity granted is transactional immunity (the state may not prosecute the witness for the transaction or matter at all), not merely use immunity (which would bar only the compelled testimony and its fruits, leaving the state free to prosecute on independently obtained evidence). The USA grants the broader variety, so independent evidence does not rescue the case.
• The privilege must be claimed first. Immunity covers testimony compelled after the witness invokes the privilege against self-incrimination. A witness who simply answers without invoking it gets nothing.
• A witness who lies under oath gets NO immunity from perjury charges.
• State immunity does not bind federal prosecutors. It forecloses state prosecution for the matter; a federal case on the same conduct is not barred.

What Rulemaking Authority Does the Administrator Have?

• May make, amend, and rescind rules, forms, and orders necessary to carry out the act
• May classify securities, persons, and matters and prescribe different requirements for different classes
• May adopt exemptions from registration requirements where consistent with public interest
• All rules and forms must be published
• Good faith reliance: no liability for acts done in good faith in conformity with a rule, form, or order, even if later found invalid
• Every administrative hearing is public unless all respondents request a private hearing and the Administrator agrees

When Can the Administrator Issue a Cease and Desist Order?

The administrator may issue a cease and desist order when any person has engaged or is about to engage in a violation.

• May be issued with or without a prior hearing
• The Administrator may also seek court action for injunctive relief, including:
  • Permanent injunction (final order requiring a person to stop conduct)
  • Temporary injunction (interim order pending final determination)
  • Restraining order (short-term order to preserve the status quo)
  • Writ of mandamus (court order requiring a person to perform an act the law requires)
  • Appointment of a receiver or conservator for defendant's assets
  • Court-ordered rescission, restitution, or disgorgement
• The Administrator is not required to post a bond when seeking court action

How Is Court-Ordered Relief Categorized?

Exam Tip: Gotchas

• The cease and desist order can be issued by the Administrator alone, with or without a prior hearing, while an injunction must be obtained from a court. (A summary suspension of a registration, or a summary denial or revocation of an exemption, can also be entered without a prior hearing, so the C&D is not the only Administrator order that skips the hearing.)
• The exam frequently tests whether the Administrator or the court grants injunctions. The answer is always the court.
• An injunction stops conduct; a writ of mandamus compels a required act. The Act lists mandamus beside injunctions and restraining orders as relief a court grants in the Administrator's action to enforce compliance, so it is aimed at the defendant. It is not limited to government officials.
• Injunctive relief addresses behavior; monetary or equitable relief addresses money or assets. A temporary injunction stops conduct; restitution, disgorgement, and receiver appointments all involve managing or returning money or assets.
• An injunction orders the defendant to stop; a receiver or conservator takes the assets out of the defendant's hands. The funds stay with the defendant under an injunction. When client assets must be secured, the answer is the receiver or conservator.

When Can the Administrator Issue a Stop Order on a Securities Registration?

The administrator may issue a stop order under the USA to deny, suspend, or revoke the effectiveness of a securities registration statement.

• The stop-order authority applies the same two-prong (or two-part) test as actions against persons:
  • Prong 1: the order is in the public interest, AND
  • Prong 2: at least one listed statutory ground is supported

Grounds include:

• Incomplete or misleading registration statement
• Willful violation of the USA in connection with the offering
• Subject to a stop order or injunction under another federal or state act
• Issuer's business includes illegal activities
• Offering has worked or would work a fraud upon purchasers
• Unreasonable underwriter/seller compensation or promoter profits
• The offering is being made on terms that are unfair, unjust, or inequitable (this ground appears in brackets in the NASAA text of the Act, added by its 1987 amendment)
• A security sought to be registered by notification is not eligible for that method
• A security sought to be registered by coordination where the required coordination undertaking was not met
• The proper filing fee was not paid (a denial order only, vacated once the fee is paid)

Summary stop orders:

• Administrator may summarily postpone or suspend effectiveness pending final determination
• Same 15-day hearing rule as a summary suspension of a person's registration: if the affected party submits a written request, the Administrator must set the matter for hearing within 15 days; if none is requested, the order stays in effect until modified or vacated
• Administrator may vacate or modify a stop order if conditions have changed

Retroactive limitation (30 days):

The Administrator may not institute a stop order proceeding against an effective securities registration based on facts known to the Administrator at the time of effectiveness unless the proceeding is started within 30 days after the effective date.

One-year limit on relying on another regulator's order:

When the ground is a stop order or injunction entered under another federal or state act, the Administrator may not institute a proceeding against an effective registration statement more than one year from the date of that order or injunction.

• The clock runs from the date the outside order was entered. It is not extended because the outside order is still in force or because the state registration remains effective.
• An order or injunction entered under another state act can be relied on only if it was based on facts that would currently support a stop order under the USA.

Exam Tip: Gotchas

• 30 days is the retroactive window for stop orders on securities registrations, and it turns on a fact or transaction known to the Administrator at effectiveness. Do not confuse it with the 90-day window for suspension or revocation of a person's registration, which is a different clock with a different trigger (a final order the applicant disclosed).
• The 15-day clock is the Administrator's, not the registrant's. After a summary postponement, the Administrator must set the matter down for hearing within 15 days after receiving a written request. The act sets no deadline for the registrant to make that request; if none is requested and none is ordered, the order simply stays in effect.
• One year is the limit for a proceeding against an effective registration that relies on another regulator's stop order or injunction, measured from the date that order or injunction was entered.
• Do not confuse any of these windows with the 60-day window for filing a petition for judicial review or the 10-year lookback for criminal convictions in person-registration actions.
• Both person-registration actions and securities-registration stop orders use the two-prong test. Public interest alone is never sufficient; a listed statutory ground is also required. Cease and desist orders do not require this two-prong finding.
• A final stop order needs three things: prior notice, opportunity for hearing, and written findings of fact AND conclusions of law. Stating the facts is not enough; the Administrator must also write the legal conclusions. Only a summary postponement skips all three, since it is immediate and pending a final determination.
• A stop order has exactly three forms: deny, suspend, or revoke the effectiveness of a registration statement. A permanent bar on later registrations is not a fourth form, and the Act lists none. Revocation is the strongest form, so it is often mistaken for one.
• Any stop order can be vacated or modified. The Administrator may do so if the conditions that prompted it have changed or the public interest supports it.

When Can the Administrator Deny, Suspend, or Revoke a Person's Registration?

Under the USA, the Administrator may deny, suspend, or revoke the registration of an applicant or registrant. Revocation is the Administrator's strongest unilateral enforcement tool against a registered person: it permanently ends the person's registration in that state (the person would have to apply for a new registration to operate there again), and unlike injunctions or restitution, it requires no court involvement.

This person-registration authority applies the same two-prong test:

• Prong 1: the order is in the public interest, AND
• Prong 2: at least one listed statutory ground exists

Listed statutory grounds include a criminal conviction within the prior 10 years involving securities or any felony, a finding of willful violation, court injunctions, dishonest or unethical practices in the securities business, or a failure to supervise.

Summary suspension: The Administrator may also summarily postpone or suspend a person's registration pending final determination of a proceeding, without a prior hearing. The affected applicant or registrant (and their employer, if the person is an agent or investment adviser representative) must be promptly notified of the order and the reasons for it. Same 15-day hearing rule as a stop order: if the person submits a written request, the Administrator must set the matter for hearing within 15 days; if no request is made, the summary order stays in effect until the Administrator modifies or vacates it.

Can the Administrator Deny or Revoke an Exemption?

Yes, but only for a specific security or transaction. The Administrator may deny or revoke an exemption by order for all of the exempt transactions and for three kinds of exempt securities: exchange-listed securities, nonprofit-issuer securities, and employee benefit plan investment contracts.

Examples of exempt transactions are an offer to institutional buyers, a limited offering to not more than ten persons in twelve months, and an offer to existing security holders.

Other exempt securities, such as government, bank, and insurance company securities, cannot be reached this way. The Administrator also has no authority to revoke a statutory exemption generally, by rule or by order.

• Ordinary order: needs appropriate prior notice to all interested parties, an opportunity for hearing, and written findings of fact and conclusions of law
• Summary order: the Administrator may summarily deny or revoke the exemption pending final determination, without prior notice or a prior hearing
• After a summary order, the Administrator must promptly notify all interested parties that it was entered and why, and set the matter for hearing within 15 days after receiving a written request
• If no hearing is requested and none is ordered, the summary order stays in effect until the Administrator modifies or vacates it
• No exemption order operates retroactively. A seller who did not know of an order, and could not have known of it with reasonable care, is not treated as violating the registration or literature-filing requirements by a sale made after the order

Exam Tip: Gotchas

• Three summary actions skip prior notice and hearing: suspending a person's registration, suspending a securities registration, and denying or revoking an exemption. Each is temporary, pending final determination, and each carries the same 15-day hearing rule.
• Summary does not mean permanent. The hearing follows the order. It does not come before it.
• Case by case only. The Administrator can pull an exemption for one security or one transaction, not abolish an exemption for everyone.
• Sentencing is never on the list. Imprisonment is a court power after a criminal prosecution, so it is never an action the Administrator takes with or without notice.

What Does "Willfully" Mean Under the USA?

Many USA enforcement provisions, including criminal penalties, apply only to willful conduct. Under the USA, willfully means the person was aware of what they were doing and intentionally performed the act, regardless of whether they knew the act was illegal.

• The willfulness standard does not require knowledge that the conduct violated the law
• It does not require evil motive or intent to defraud
• It is a higher standard than negligence (intentional, not careless), but a lower standard than requiring knowledge of illegality

What Can the Administrator Do, and What Requires a Court?

Exam Tip: Gotchas

• The Administrator is a quasi-judicial authority. The Administrator can issue cease and desist orders and deny/suspend/revoke registrations, but cannot impose fines, grant injunctions, order restitution, appoint receivers, or sentence anyone to prison. Those powers belong to the courts. This distinction is heavily tested.

What Authority Does the Administrator Have Over Federal-Covered Investment Advisers?

The National Securities Markets Improvement Act of 1996 (NSMIA) preempts state registration of federal-covered investment advisers (those registered with the SEC). NSMIA made this change by amending the Investment Advisers Act of 1940, and it made the parallel change for federal covered securities in the Securities Act of 1933, which a state may not require to register but may still police for fraud. However, the Administrator retains specific authority:

• May require notice filings with the state, together with a consent to service of process
• May require payment of state fees
• May license the adviser's investment adviser representatives who have a place of business in the state
• Retains full antifraud enforcement authority under the USA

The Administrator may not:

• Require a federal-covered adviser to register at the state level
• Suspend or revoke the adviser's federal SEC registration (only the SEC may do that)
• Set the adviser's fee schedule

What Should You Check on Exam Day?

• The Administrator cannot grant injunctions, issue jail sentences, or make judicial determinations of fraud; those require a court
• Jurisdiction over an offer or sale exists if it originated in, was directed to, or was accepted in the state; any one of the three is enough
• Compelled testimony after a claim of self-incrimination privilege carries transactional immunity, not just use immunity, but a witness who lies still faces perjury or contempt charges
• Stop orders on securities registrations and denial/suspension/revocation of person registrations both require the same two-prong test: public interest and a listed statutory ground
• "Willfully" means the person intentionally performed the act, not that they knew it was illegal; it is a higher standard than negligence but lower than knowledge of illegality