State Enforcement and Antifraud Authority

This section covers the Uniform Securities Act (USA) antifraud authority, the Administrator's enforcement powers, the ability to revoke exemptions, and the adviser-specific antifraud provisions.

Does Antifraud Authority Apply to Exempt and Federal Covered Securities?

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.

What Enforcement Powers Does the Administrator Have?

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 Can the Administrator 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 Can the Administrator NOT 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 for most categories AND retains full antifraud enforcement authority. The National Securities Markets Improvement Act (NSMIA) preempts registration but NOT fraud enforcement.
• Exception: exchange-listed federal covered securities. For these, federal law bars a state from requiring any filing or fee at all, not even a notice filing. The Administrator's antifraud authority still survives; only the notice-filing piece disappears for this one category.
• Revoking the exchange-listed exemption is a separate, state-law power. It is not the same question as whether a state can charge a fee or demand a filing. NSMIA blocks the fee and filing for an exchange-listed federal covered security, but it does not touch the Administrator's authority to revoke that security's state exemption. A national exchange listing does not place a security beyond the Administrator's exemption-revocation reach.

What Does the General Antifraud Provision Prohibit?

The general antifraud provision applies to any person, in connection with the offer, sale, or purchase of any security. It makes three things unlawful:

1. Employing any device, scheme, or artifice to defraud
2. Making an untrue statement of a material fact, or omitting a material fact necessary to make the statements made not misleading
3. Engaging in any act, practice, or course of business that operates or would operate as a fraud or deceit upon any person

This provision has no exemptions. It reaches every security and every person, whether or not that person is registered or required to register.

Does the USA Have a Separate Antifraud Provision for Investment Advisers?

Yes. A second, adviser-specific antifraud provision layers on top of the general provision above. It applies only to a person who receives compensation, directly or indirectly, for advising others about the value of securities or their purchase or sale, whether through analyses, reports, or otherwise. This adviser antifraud provision has no exemptions either.

What Are the Four Prohibited Acts Under the Rendition-of-Advice Prong?

The rendition-of-advice prong makes it unlawful for a compensated adviser to:

1. Employ any device, scheme, or artifice to defraud the client
2. Engage in any act, practice, or course of business that operates as a fraud or deceit on the client
3. Act as principal for the adviser's own account, or as broker for someone other than the client, and knowingly buy from or sell to the client without disclosing in writing, before completion of the transaction, the capacity in which the adviser is acting, and without obtaining the client's consent to the transaction. This prohibition does not apply to a transaction with a broker-dealer's customer if that broker-dealer is not acting as an investment adviser toward the customer for that transaction
4. Engage in dishonest or unethical practices as the Administrator may define by rule

How Does the Solicitation Prong Differ From the Rendition-of-Advice Prong?

A separate solicitation prong prohibits an adviser from making an untrue statement of a material fact, or omitting a material fact, while soliciting advisory clients. Solicitation covers fraud aimed at attracting new clients.

The four prohibited acts above instead cover fraud during the rendition of advice: the ongoing advisory relationship with a client the adviser already has, such as a portfolio review. Neither prong requires a completed purchase or sale.

Exam Tip: Gotchas

• The principal-trading disclosure and consent requirement is per-transaction, not a one-time blanket consent. A client's blanket consent at account opening to all future principal trades does not satisfy the rule; the adviser must disclose the capacity in writing and obtain consent before completing each individual transaction.
• The dishonest-or-unethical-practices prohibition is a catch-all. Conduct does not need to be specifically listed elsewhere in the USA; the Administrator can define new categories of dishonest or unethical practices by rule and act on them.
• Rendition of advice versus solicitation is a favorite scenario trap. An adviser who misstates a fund's performance to an existing client during a portfolio review has violated the rendition-of-advice prong, not the solicitation prong, because solicitation only covers the effort to attract new clients. Both prongs still apply with no completed transaction required.

What Should You Check on Exam Day?

• Do you know antifraud authority applies to exempt securities, exempt transactions, and federal covered securities alike, with no exemption from fraud ever?
• Can you list the Administrator's enforcement powers: stop orders, exemption denial/suspension/revocation, investigation, cease and desist orders, and criminal referral?
• Do you know which exemptions the Administrator can revoke (exchange-listed, nonprofit, employee benefit plan, and all exempt transactions) versus cannot revoke (government and bank securities, and other inherently exempt securities)?
• Do you know that NSMIA preempts state registration of federal covered securities but does NOT preempt the Administrator's notice-filing authority (except for exchange-listed federal covered securities, which allow no filing or fee at all) or antifraud enforcement authority?
• Can you name the three prongs of the general antifraud provision: device/scheme/artifice to defraud, an untrue statement of a material fact or a misleading omission, and any act or course of business operating as a fraud or deceit, applicable to any person and any security?
• Can you name the four prohibited acts under the rendition-of-advice prong: device/scheme to defraud, an act or course of business operating as a fraud or deceit, principal trading without written disclosure and client consent completed before the transaction (except toward a broker-dealer's customer when the firm is not acting as adviser for that transaction), and dishonest or unethical practices as the Administrator may define by rule?
• Do you know the difference between solicitation fraud (attracting new advisory clients) and rendition-of-advice fraud (the ongoing relationship with an existing client), and that neither requires a completed transaction?