State Enforcement and Antifraud Authority

This section covers the Uniform Securities Act (USA) antifraud provisions (Section 101 and Section 102), 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 (402(a))
• Exempt transactions (402(b))
• Federal covered securities

No exemption from antifraud provisions - fraud is never exempt.

USA Section 101: General Antifraud Provision

Section 101 is the broadest antifraud provision under the USA. It prohibits fraudulent conduct in connection with the offer, sale, or purchase of any security.

Scope of Section 101

• 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 Section 101

The Three Prongs of Section 101

Section 101 prohibits three categories of conduct in connection with the offer, sale, or purchase of any security:

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 Section 101 regardless of whether the person intended harm. Prong 1 (deliberate scheme) is the prong that requires intentional conduct; prong 3 does not.
• Section 101 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 sections, not the antifraud provision.
• 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 Section 102: Advisory Antifraud

Section 102 specifically targets persons who receive consideration for advising on the value of securities or the advisability of investing. It has narrower scope than Section 101 but adds advisory-specific prohibitions.

Section 101 vs Section 102

Both sections have no exemptions. Registration does not shield any person from either section.

Section 102(a): Four Prohibited Acts in the Rendition of Advice

Section 102(a) covers fraud in the rendition of advice (the ongoing advisory relationship, including portfolio reviews and investment recommendations). It enumerates four specific prohibited acts:

• 102(a)(1): Employing any device, scheme, or artifice to defraud
• 102(a)(2): Engaging in any act, practice, or course of business that operates as a fraud or deceit
• 102(a)(3): Principal trading without written disclosure and client consent (see below)
• 102(a)(4): Engaging in dishonest or unethical practices as the Administrator may define by rule

Section 102(a)(3): 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), Section 102(a)(3) 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)

Section 102(b): Solicitation of Advisory Clients

Section 102(b) covers fraud in the solicitation of advisory clients: untrue statements or omissions made while attracting new clients. Together with 102(a), it covers the advisory relationship from initial solicitation through ongoing advice.

Exam Tip: Gotchas

• Section 102(a)(3) 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.
• Section 102(a) covers the rendition of advice to existing clients. Section 102(b) covers solicitation of new clients. False performance claims to an existing client during a portfolio review fall under 102(a), not 102(b).
• Both Section 101 and Section 102 can apply to the same conduct. Section 101 covers any person in any securities transaction; Section 102 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 (USA Section 306)
• Deny, suspend, or revoke exemptions for specific securities or transactions (USA Section 402(c))
• 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 (402(a)(8))
• Nonprofit organization exemption (402(a)(9))
• Employee benefit plan exemption (402(a)(11))
• All exempt transactions under 402(b)

Which Exemptions the Administrator CANNOT Revoke

• Government securities (402(a)(1))
• Bank securities (402(a)(3))
• Other "inherently exempt" securities cannot have their exemptions revoked by the Administrator

Exam Tip: Gotchas

• The Administrator can revoke certain exemptions (402(a)(8), (9), (11) and 402(b)) 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.