This section covers the Uniform Securities Act (USA) antifraud provisions (the general antifraud provision and the advisory antifraud provision), the Administrator's enforcement powers, and the ability to revoke exemptions.
Antifraud: Universal Application
The Administrator retains antifraud authority over ALL securities and transactions, including:
- Exempt securities (on the USA exempt-securities list)
- Exempt transactions (on the USA exempt-transactions list)
- Federal covered securities
No exemption from antifraud provisions: fraud is never exempt.
USA General Antifraud Provision
The USA's general antifraud provision is the broadest antifraud rule under the Act. It prohibits fraudulent conduct in connection with the offer, sale, or purchase of any security.
Scope of the General Antifraud Provision
- Applies to offers, sales, AND purchases of any security (not just completed sales)
- Protects both buyers and sellers
- Applies to every person: registered or unregistered, individual or entity, broker-dealer, agent, investment adviser, investment adviser representative, or issuer
- No exemptions: registration status does not shield any person from the general antifraud provision
The Three Prongs of the General Antifraud Provision
The general antifraud provision prohibits three categories of conduct in connection with the offer, sale, or purchase of any security:
| Prong | Prohibited Conduct | Intent Required |
|---|---|---|
| Prong 1 | Employing any device, scheme, or artifice to defraud | Yes, intentional conduct |
| Prong 2 | Making an untrue statement of a material fact, or omitting a material fact necessary to make statements not misleading | Generally yes, depending on context |
| Prong 3 | Engaging in any act, practice, or course of business that operates as a fraud or deceit upon any person | No, conduct need only operate as fraud |
The Materiality Standard
Information is material when a reasonable investor would consider it important in making an investment decision. There is no specific percentage threshold; materiality is judged by the reasonable-investor test, not by whether the information was filed with the Administrator or publicly disclosed.
Exam Tip: Gotchas
- Prong 3 does not require proof of intent. If conduct operates as fraud (the effect of defrauding someone), it violates the general antifraud provision regardless of whether the person intended harm. Prong 1 (deliberate scheme) is the prong that requires intentional conduct; prong 3 does not.
- The general antifraud provision covers offers, sales, and purchases. It is not limited to completed transactions, and it protects both buyers and sellers.
- Failure to register is not one of the three prongs. Registration violations are addressed under separate USA provisions, not the antifraud rule.
- Materiality is not measured by a price-impact threshold (such as 5%) or by whether the Administrator required the information to be filed. The test is whether a reasonable investor would consider it important.
USA Advisory Antifraud Provision
The USA's advisory antifraud provision specifically targets persons who receive consideration for advising on the value of securities or the advisability of investing. It has narrower scope than the general antifraud provision but adds advisory-specific prohibitions.
General Antifraud vs Advisory Antifraud
| Provision | Applies To | Trigger |
|---|---|---|
| General antifraud | Any person | Offer, sale, or purchase of any security |
| Advisory antifraud | Persons who receive consideration for advising on securities | Rendition of advice or solicitation of advisory clients |
Both provisions have no exemptions. Registration does not shield any person from either rule.
Four Prohibited Acts in the Rendition of Advice
The rendition-of-advice prong of the advisory antifraud provision covers fraud in the rendition of advice (the ongoing advisory relationship, including portfolio reviews and investment recommendations). It enumerates four specific prohibited acts:
- Employing any device, scheme, or artifice to defraud
- Engaging in any act, practice, or course of business that operates as a fraud or deceit
- Principal trading without written disclosure and client consent (see below)
- Engaging in dishonest or unethical practices as the Administrator may define by rule
Principal Trading Disclosure
When an investment adviser acts as principal in a transaction with a client (selling securities from the firm's inventory to the client, or buying from the client into firm inventory), the advisory antifraud provision requires:
- Written disclosure of the capacity in which the adviser is acting (oral disclosure is insufficient)
- Client consent before completion of the transaction (not after)
- Per-transaction disclosure and consent (a blanket consent obtained at account opening does NOT satisfy the requirement)
Solicitation of Advisory Clients
The solicitation prong of the advisory antifraud provision covers fraud in the solicitation of advisory clients: untrue statements or omissions made while attracting new clients. Together with the rendition-of-advice prong, it covers the advisory relationship from initial solicitation through ongoing advice.
Exam Tip: Gotchas
- Principal trading disclosure requires written disclosure plus per-transaction consent. Oral disclosure does not satisfy the rule, and a blanket consent at account opening does not satisfy the rule. Each principal transaction needs its own written disclosure and prior consent.
- The disclosure and consent must be obtained before completion of the transaction. Post-transaction disclosure (such as on the trade confirmation) is too late.
- Advisers are not prohibited from acting as principal. They must follow the disclosure-and-consent procedure.
- The rendition-of-advice prong covers existing clients (portfolio reviews, ongoing recommendations). The solicitation prong covers new clients. False performance claims to an existing client during a portfolio review fall under rendition of advice, not solicitation.
- Both the general and advisory antifraud provisions can apply to the same conduct. The general rule covers any person in any securities transaction; the advisory rule narrows to advisory activity for compensation.
Administrator Enforcement Powers
The Administrator can:
- Issue stop orders to suspend or revoke the effectiveness of a registration statement
- Deny, suspend, or revoke exemptions for specific securities or transactions under the Administrator's exemption-revocation authority
- Investigate suspected violations
- Issue cease and desist orders
- Refer criminal matters to prosecutors
Which Exemptions the Administrator CAN Revoke
The Administrator can deny, suspend, or revoke exemptions under:
- Exchange-listed securities exemption (USA exempt-securities list)
- Nonprofit organization exemption (USA exempt-securities list)
- Employee benefit plan exemption (USA exempt-securities list)
- All exempt transactions on the USA exempt-transactions list
Which Exemptions the Administrator CANNOT Revoke
- Government securities
- Bank securities
- Other "inherently exempt" securities cannot have their exemptions revoked by the Administrator
Exam Tip: Gotchas
- The Administrator can revoke certain exemptions (exchange-listed, nonprofit, employee benefit plan, and all exempt transactions) but NOT all exempt securities. Government securities, bank securities, and other inherently exempt securities cannot have their exemptions revoked.
- Even though states cannot require registration of federal covered securities, the Administrator CAN require notice filings AND retains full antifraud enforcement authority. The National Securities Markets Improvement Act (NSMIA) preempts registration but NOT fraud enforcement.