Ch. 7 Administration of the USA

Question 1

Who regulate securities-related activities that occur within their states?

Answer 1

Administrators

Question 2

Two parts to a transaction-

Answer 2

1) Offer

2) Sale

Question 3

What is jurisdiction?

Answer 3

1) The power to interpret and apply the law

2) Territorial range of authority or control

Question 4

Administrator’s jurisdiction with security offerings?

Answer 4

Any offerings made or accepted in the state

Question 5

What dictates if an offer was made in the state?

Answer 5

If the offer was originated in, directed to, or received in the administrator’s state

Question 6

On Monday, Phillip, an agent of a broker-dealer, calls Jean, an existing client, and recommends that she purchase 10,000 shares of stock. Jean calls Phillip on Wednesday night and agrees to purchase the stock. The transaction is executed early on Thursday morning. When did the offer and/or sale take place?

Answer 6

Although Jean didn’t agree to purchase the stock immediately, the offer occurred on Monday when Phillip first made the recommendation.
The sale occurred on Thursday—the day the trade was executed. The execution signals the existence of a contract in which a buyer and seller agree to exchange a security for value. Under the USA, this example describes both an offer and a sale.

Question 7

Mark, an agent of a broker-dealer, is located in his firm’s Connecticut branch office. Mark calls and speaks with his client who lives in New Hampshire. While speaking with his client, if Mark solicits the sale of EBH, Inc. common stock, which state Administrator will have jurisdiction?

Answer 7

Since the offer originated in Connecticut and was directed to and received in New Hampshire, the offer is considered to have been made in Connecticut and New Hampshire. Ultimately, since the offer was made in both Connecticut and New Hampshire, the Administrators of both states have jurisdiction over the offer to sell.

Question 8

An agent of a broker-dealer, who works out of his firm’s Virginia branch office, calls a client who lives in Maryland to solicit the sale of a security. The client agrees to buy the security and arranges to meet the agent at a restaurant in West Virginia to take possession of the securities and provide a check as payment. Which state Administrator has jurisdiction in this example?

Answer 8

The offer was made in Virginia where it originated, but also in Maryland, where it was directed, received, and accepted. Therefore, both the Virginia and Maryland state Administrators have jurisdiction. What about the Administrator of West Virginia? The USA doesn’t recognize the jurisdiction of states where securities are simply delivered or where the payment is made. Therefore, the state Administrator of West Virginia doesn’t have jurisdiction. Remember, the determination of which Administrator has jurisdiction is based on the details of the offer, not the details of the payment or delivery of the securities.

Question 9

Herman is an agent of a broker-dealer that’s located in California. To solicit the sale of a security, he sends a letter to Ms. Rose, his client who resides in Arizona. Unbeknownst to Herman, Ms. Rose is visiting her brother in Wyoming for a few weeks and is having her mail forwarded to Wyoming. Will the state Administrator from all three states have jurisdiction?

Answer 9

The Administrator of California will have jurisdiction since the offer originated there. Although Ms. Rose never received the offer while in Arizona, an offer was considered to be made because it was directed to and received in Arizona. The USA jurisdiction rule doesn’t recognize an offer being made in any state to which mail is forwarded. Therefore, the offer is made in California and Arizona and the state Administrator of these two states will have jurisdiction over the offer.

Question 10

Jill, an agent licensed in Ohio, publishes an offer to sell bonds in a local newspaper. If the newspaper has some of its circulation in Pennsylvania, is the offer considered to have been made in Pennsylvania?

Answer 10

No. An offer in a newspaper may only be made in the state in which the paper is published. In this example, the newspaper is published in Ohio and, since there’s no indication that more than two-thirds of the circulation is outside of the publishing state, the offer is made in Ohio. Therefore, the Ohio Administrator has jurisdiction.

Question 11

Jim lives in Texas and is watching a ballgame being broadcast by a station in Chicago, IL. At a break in the action, a reporter is shown interviewing an agent in Chicago. The agent is promoting a stock and provides his firm’s number for interested investors. Is this considered an offer to residents of Texas?

Answer 11

No. Since the reporter’s interview is being broadcast from Illinois, the offer is only be considered to have been made there, because the agent has no control over where the broadcast is received.

Question 12

Al gives his nephew Eric 1,000 shares of stock that trade on the NYSE. Al tells Eric that the stock will help to cover the costs of his future college education. However, within one year, the company is bankrupt and the stock is worthless. Will the Administrator in Eric’s state consider this situation to be a sale?

Answer 12

No. Al freely gave his nephew the stock without requiring payment or other exchange in value. While it was unfortunate that the company became insolvent, since the stock was a gift and Eric had nothing to lose, it’s not considered an offer or sale. The stock Eric received was considered non-assessable.

Question 13

Earl owns 1,000 shares of assessable Hawaiian Railroad (HRR) stock. The board of directors of HRR announces a $3.00 per share assessment to investors which must be paid over a period of two years. Earl doesn’t want to put more money into the investment and decides to use the stock to entice a customer to buy products from his general store. Earl tells the customer that if he spends a certain amount of money at his store, he will give him a free gift of shares of the Hawaiian Railroad Company. How does the state Administrator view this situation?

Answer 13

In the 1880s, many would have considered this an unethical act. However, today this practice is illegal. Under the USA, Earl is required to disclose to the customer the ramifications of accepting a gift of assessable securities. If the customer takes possession of the assessable shares, Earl will be relieved of any obligation to pay the assessment to Hawaiian Railroad—an obligation that the customer (unknowingly) will assume. For this reason, a gift of assessable stock is considered to involve both an offer and a sale.

Question 14

Jim, an agent of a broker-dealer, has been accused of unauthorized trading by a customer. After a hearing, the state Administrator revokes Jim’s registration as an agent. May this disqualification be used against the broker-dealer’s registration?

Answer 14

Yes. The Administrator may take action against Jim’s broker-dealer if it’s determined that the firm failed to reasonably supervise Jim’s activities.

Question 15

What is a cease and desist order?

Answer 15

demand to halt an activity immediately or risk facing legal action

Question 16

What is an injunction?

Answer 16

A restraining order

Question 17

After investigating one of the brokerage firms in her state, the Administrator of Iowa has determined that the firm is selling unregistered, non-exempt securities in Iowa. Although a cease and desist order has been issued against the firm, it becomes apparent that the firm is ignoring the order. What step may the Administrator take?

Answer 17

The Administrator may ask the state court to issue an injunction prohibiting the firm from selling securities in Iowa. The court has the authority to fine the firm and its principals, in addition to having the owners of the firm imprisoned. Remember, ignoring a court-ordered injunction is considered contempt of court.

Administrators may seek, but may not issue injunctions. Only a court has the authority to issue injunctions

Question 18

if the Administrator determines that a registered person is no longer living, has ceased business, has been found to be mentally incompetent, or cannot be located after a reasonable search, an existing registration can be ______

Answer 18

cancelled without a hearing

Question 19

An Administrator may deny, suspend, or revoke a registration for ______ reasons. However, the cancellation or withdrawal of registration is done for ______ reasons.

Answer 19

punitive; non-punitive

Question 20

Customers seeking remedies for monetary damages that were the result of alleged violations of the securities acts may sue in _____ court

Answer 20

Civil

Question 21

Imelda purchased 1,000 shares of stock at $18 per share. Her shares were part of an IPO that was underwritten by Bedrock Brokerage. A few months after the offering, the stock paid its first dividend of $0.25 per share. However, one week after the dividend payout, a negative report was released by the issuer and the market price of the stock plummeted. Imelda believes the issuer and Bedrock knew of the bad news at the time she purchased the stock. What recourse does Imelda have? What could she recover?

Answer 21

Imelda may file a lawsuit in state court against the issuer and Bedrock for omitting material facts in connection with the offering. If she wins her lawsuit against Bedrock, she may recover the original purchase price of $18,000 (1,000 shares x $18), plus interest that accrues from the day that she bought the securities until she receives her settlement, plus court costs and reasonable attorney fees, minus the $250 dividend.

Question 22

What is a letter of rescission?

Answer 22

used when a firm realizes that it has effected an illegal sale. This letter represents an offer to buy back the security, plus interest, minus any income received on the security.

Question 23

Younge Securities has discovered that one of its agents sold a security to Ramona and it was not registered in the state in which the transaction occurred. Younge’s compliance department cannot find an exemption for the transaction and, rather than waiting to be sued, sends a letter to Ramona offering to buy back the stock, plus interest, minus any dividends she may have received from the stock. Is Ramona required to accept the firm’s offer?

Answer 23

No. Ramona may choose to ignore the firm’s offer. If the stock has appreciated in value since Ramona purchased it, she may not want to rescind the trade.
If Ramona doesn’t respond within 30 days of receiving the letter, she will not be able to sue Younge Securities.

Question 24

Clyde has a managed account with an investment adviser. After a few months, Clyde notices that his portfolio contains a large amount of the stock of a small local company. He discovers that the company’s majority owner is the husband of one of the advisory firm’s senior officers. Clyde believes that the purchase of this stock for his portfolio represents a conflict of interest. Since the conflict was not disclosed, what action may Clyde take against the advisory firm?

Answer 24

Clyde may hire an attorney to file a lawsuit against the adviser. In the lawsuit, he may seek to recover the advisory fees paid, any loss on the stock, interest, costs, and attorney fees. However, any settlement (if Clyde wins) will be reduced by any income earned from this security while it was in his account. The liability also extends to supervisors who may be deemed guilty for failing to supervise their employees properly.

Question 25

A criminal liability exists if a person ______ violates an order or provision of the Uniform Securities Act.

Answer 25

willfully

Question 26

An agent in Maine sends a prospectus to a client in New Hampshire. The client takes the prospectus with him when he goes to New Jersey on vacation, and gives it to his cousin. According to the USA, an offer has been made in:

a. Maine only
b. New Hampshire only
c. New Hampshire and New Jersey only
d. Maine and New Hampshire only

Answer 26

(D) The offer originated in Maine and the agent directed it to a person in New Hampshire. However, the agent never directed the offer to any person in New Jersey.

Question 27

Under the Uniform Securities Act, a sale or offer to sell does NOT include a(n):

a. Unsuccessful solicitation to sell a non-assessable stock
b. Gift of assessable stock
c. Warrant attached to the purchase of a bond
d. Stock dividend received by a customer

Answer 27

(D) A stock dividend is not considered an offer or sale. A gift of assessable stock is considered to involve an offer and a sale. An unsuccessful solicitation constitutes an offer regardless of whether the stock is assessable or non-assessable. Any security given or delivered with a purchase is considered to have been offered and sold for value.

Question 28

Herman tapes an infomercial to promote the securities that his firm is underwriting. The infomercial is broadcast from a television station in South Dakota where Herman has his office, but viewers across the state line in Montana also see the infomercial. Where is the offer considered to be made?

a. Montana only
b. South Dakota only
c. Montana and South Dakota
d. The offer is not made in either state

Answer 28

(B) A radio or television program is not considered an offer in the state in which the broadcast is received if the program originates from another state.

Question 29

Answer Yes or No to whether the following activities involve an offer or sale.

a. _____ Adrienne takes some stock certificates she owns to her bank and pledges them as collateral for a car loan.
b. _____ Martha gives her granddaughter 500 shares of Outtel, which is listed on Nasdaq.
c. _____ WXYZ Company pays a 25% stock dividend to its shareholders.
d. _____ A railroad company gives 1,000 shares of Class B assessable stock to Bill, a director. The company warns Bill that by accepting the stock, he agrees to provide a certain amount of capital to the company if needed in the future.
e. _____ Bobbi owns 100 shares of PQR Corporation, which is merging with XYZ Company. Bobbi will receive 200 shares of XYZ in exchange for his 100 shares of PQR under the terms of the merger.

Answer 29

a. (No) A bona fide pledge of stock doesn’t involve an offer or sale.
b. (No) A gift of non-assessable stock doesn’t involve an offer or sale.
c. (No) A stock dividend doesn’t involve an offer or sale, as long as the shareholders don’t provide anything of value in return.
d. (Yes) This stock is assessable, since Bill may be required to provide additional capital to the issuer. This gift involves an offer and a sale.
e. (No) An exchange of

Question 30

The Administrator of the state of California has begun an investigation of an agent’s broker-dealer. The agent works in a branch office in Ohio and is registered as an agent in both Ohio and California. The agent receives a subpoena to testify at a hearing in Los Angeles. Her supervisor tells her that if she testifies, she will no longer have a job when she returns. In this situation, what should the agent do?

a. Comply with the subpoena and testify.
b. Resign as an agent and ignore the subpoena.
c. Refuse to cooperate unless she receives her firm’s approval.
d. Request an exemption from the California Administrator since her office is in Ohio.

Answer 30

(A) According the Uniform Securities Act, no person is excused from attending and testifying in response to a subpoena, and no individual can be prosecuted or subjected to any penalty for testifying.

Question 31

Rose is an agent in North Dakota. Emily, one of her former clients, has complained to the state Administrator about an investment that Rose sold her. The Administrator sends Rose a subpoena for her records of the sale that Rose ignores because Emily is no longer a client. What may the Administrator do to get Rose to comply with the subpoena?

a. Fine Rose a maximum of $10,000 for contempt.
b. Issue a warrant for Rose’s arrest.
c. Request that a court issue an order that Rose obey the subpoena.
d. Take Rose’s deposition.

Answer 31

(C) The Administrator may go to court to request that a judge issue an order to enforce the subpoena. If Rose still fails to comply, the court (not the Administrator) may fine her or imprison her for contempt of court.

Question 32

A broker-dealer in Florida is using a unique method of selling stock that allows the broker-dealer to circumvent the state’s blue-sky laws. Since it’s unclear how these laws apply to this situation, the Administrator may:

a. Change the law
b. Issue a new rule to clarify the state statute
c. Cancel the law
d. Request a court hearing with the SEC

Answer 32

(B) Only the state legislature may change the state’s blue-sky laws; however, the Administrator may issue rules to interpret or clarify the law.

Question 33

An Administrator may deny, revoke, or suspend a registration in all of the following circumstances, EXCEPT:

a. The registrant was convicted of a felony eight years ago
b. The registrant is determined by the Administrator to be insolvent because liabilities exceed assets, despite the fact that the registrant is able to meet all current obligations
c. The registrant’s application contained a clerical error about an immaterial fact
d. The registrant recommended placing all of a 93-year-old man’s assets in limited partnerships

Answer 33

(C) Choice (a) applies since a registration may be denied, revoked, or suspended because the registrant was convicted of any felony during the past 10 years, or a misdemeanor involving securities. Choice (b) applies because the Administrator has determined that because liabilities exceed assets, the registrant is insolvent even if current obligations can be met. Choice (d) describes a situation in which the registrant has clearly made an unsuitable recommendation, which is an unethical and dishonest practice. Choice (c) is not applicable since the misstatement concerned an immaterial fact.

Question 34

Karl is an investment adviser representative in Nebraska. The Administrator may cancel Karl’s registration for all of the following reasons, EXCEPT if he:

a. Is declared mentally incompetent and confined to a state hospital
b. Has disappeared and cannot be located after a reasonable search
c. Has died
d. Frequently recommends speculative small-cap securities to his clients

Answer 34

(D) All of the other choices are valid reasons for canceling a person’s registration.

Question 35

Under the Uniform Securities Act, which of the following persons has the power to investigate suspected violations of blue-sky laws?

a. The governor of the state
b. The SEC
c. The Administrator
d. The USA doesn’t specify who may investigate violations

Answer 35

(C) Under the Uniform Securities Act, the Administrator is empowered to investigate suspected violations of the Act.