Quick Answer
Sellers, investment advisers, and their controlling persons can face civil liability for registration violations or fraud, with remedies including recovery of consideration paid plus interest. Suits must be filed within the earlier of 3 years from the sale or advice, or 2 years from discovering the violation. Rescission offers and a 60-day judicial-review window also apply.
The Uniform Securities Act (USA) civil liability provision imposes liability on sellers of securities, investment advisers, and their controlling persons when securities laws are violated.
Who Can Be Sued?
Sellers of Securities
Sellers face civil liability when they:
- Sold unregistered, non-exempt securities (violation of registration requirements)
- Sold securities through fraud or material misstatements/omissions
Investment Advisers
Investment advisers face civil liability when they:
- Provided advice in violation of registration requirements
- Used any device, scheme, or artifice to defraud clients
- Engaged in acts that operate as fraud or deceit on clients
Controlling Persons
Every person who directly or indirectly controls a liable person is also liable, including:
- Partners, officers, directors
- Employees who materially aid in the violating conduct
- Broker-dealers or agents who materially aid
- Liable jointly and severally with the primary violator
- Defense: did not know and could not have known through reasonable care
What Can a Buyer Recover?
| If buyer still owns the security | If buyer has sold the security |
|---|---|
| Tender the security back and recover: purchase price + interest - income received | Recover damages: (purchase price + interest - income received) minus value when sold - interest from date of disposition |
What Can an Investment Adviser's Client Recover?
- May recover: consideration paid for advice + any losses due to the advice + interest + costs + reasonable attorney's fees - income received from the advice
What Is the Statute of Limitations for Civil Suits?
Two-part test, whichever expires first:
- 3 years after the contract of sale or the rendering of investment advice, OR
- 2 years after discovery of the facts constituting the violation
- Whichever comes first (the earlier deadline controls)
| Scenario | Can Sue? |
|---|---|
| Violation 18 months ago, just discovered | YES (within both limits) |
| Violation 4 years ago, discovered 1 year ago | NO (more than 3 years from occurrence) |
| Violation 2.5 years ago, discovered 2.5 years ago | NO (more than 2 years from discovery) |
Exam Tip: Gotchas
- If a client discovers fraud 2.5 years after the sale, they have only 6 months left (until the 3-year mark), not a full 2 years. If they discover it after 3 years, they are time-barred entirely regardless of the 2-year discovery rule.
How Does a Rescission Offer Limit Liability?
A seller or adviser may limit liability by making a written rescission offer before the buyer files suit.
- The offer must include: refund of consideration paid + interest - income received
If Buyer Still Owns the Security
- Buyer must accept the offer within 30 days of receipt or lose the right to sue
If Buyer No Longer Owns the Security
- Buyer must reject the offer in writing within 30 days to preserve the right to sue
Tender of the security may be made at any time before entry of judgment.
Exam Tip: Gotchas
- If a buyer who still owns the security fails to respond to a rescission offer within 30 days, they lose the right to sue.
- If the buyer already sold the security, they must affirmatively reject in writing within 30 days to preserve the right to sue. This is a statutory exception to the ordinary rule that silence isn't acceptance: here, silence DOES bar the right to sue, just like the still-owns scenario above.
What Other Civil Liability Rules Apply?
- Causes of action survive the death of any plaintiff or defendant
- Contracts made in violation of the act are unenforceable by the violator
- Any contract provision requiring a client to waive compliance with the act is void
- Rights under the USA are in addition to other rights at law or equity
- Burden of proof (fraud claims): the seller must prove they did not know and could not have known of the untruth or omission; the buyer need only show the violation occurred
- Registration violations are strict liability: the reasonable-care defense applies to "the untruth or omission," which exists only in a fraud case. A seller who sold while unregistered, or sold an unregistered security, is liable no matter how careful they were
How Does Judicial Review of Administrative Orders Work?
| Element | Detail |
|---|---|
| Who may appeal | Any person aggrieved by a final order of the Administrator |
| Filing deadline | Written petition within 60 days after the entry of the order |
| Court power | May affirm, modify, enforce, or set aside the order (in whole or in part) |
| Standard of review | Administrator's findings of fact are conclusive if supported by competent, material, and substantial evidence |
| Additional evidence | Court may order additional evidence to be taken before the Administrator if reasonable grounds for failure to present it earlier |
| Stay of order | Filing an appeal does NOT automatically stay the Administrator's order; a court must specifically order a stay |
Exam Tip: Gotchas
- Filing for judicial review does NOT stop the Administrator's order from taking effect. Unless the court specifically grants a stay, the order remains in full force during the appeal. A suspended person cannot continue operating just because they filed an appeal.
What Should You Check on Exam Day?
- Sellers are liable for selling unregistered, non-exempt securities or for fraud/material misstatements; advisers are liable for registration violations or defrauding clients
- Controlling persons, including partners, officers, directors, and materially aiding employees or broker-dealers, are jointly and severally liable, with a reasonable-care defense
- Buyer remedies differ by whether the security is still owned: tender-back-and-recover vs. recover-the-difference
- The civil statute of limitations is the earlier of 3 years from the transaction or 2 years from discovery, not a full 2 years in every case
- A rescission offer requires the still-owns buyer to accept within 30 days, and the already-sold buyer to reject in writing within 30 days; silence bars the suit either way
- Registration violations are treated as strict liability, while the reasonable-care defense applies only to fraud claims (untruth or omission)
- Causes of action survive death, violating contracts are unenforceable by the violator, and any waiver of USA compliance is void
- Judicial review requires a written petition within 60 days, and filing an appeal does not automatically stay the Administrator's order