Chapter 7 Flashcards
4 basic tools that can be used to enforce USA:
- Orders issued by the Administrator
- Actions against registration
- Civil actions
- Criminal actions
Offer vs sale
Offer: Every attempt to dispose of and every solicitation to buy a security.
Sale: Any contract or agreement to dispose of a security for value.
What does the Administrator have jurisdiction over?
The administrator has jurisdiction over any offers to buy or sell a security that is made or accepted in its state. An offer is considered to be made in a state of the offer originated in or was direct to or received in the Adminstrator’s state. Directed means that if investor A lives in state A and calls investor B in state B to make an offer for a security, the offer originated in state A and is being directed to state B. In the case of an offer made through a newspaper, the Administrator of the state in which the newspaper is published has jurisdiction over the offer, but there’s one exception to this rule. If the newspaper is published in a state and more than two-thirds of its circulation is outside the publishing state,
then no offer is considered to have been made in the state. If that’s the case, then no state Administrator will have jurisdiction. If an offer is made by means of a radio or television program, the only possible state in which the offer is considered to have been made is the state from which the broadcast originates.
- There are some situations in which state registration is not
required. However, a state Administrator will still have
jurisdiction over all securities-related activity. - If an offer is made using mail or telephone: jurisidiction is in two states at most. If made using tv or radio, one state at most. If made using newspaper or magazine, one state or no state.
Offer/sale example:
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?
The offer takes place on Monday and the sale takes place on Thursday
Jurisdiction example:
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?
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. 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.
Do gifts of securities have to be regulated by USA?
Not necessarily unless it’s a gift of assessable securities.
Assessable securities
A class of stock where the issuing company is allowed to demand additional funds from existing stockholders. Assesable securities involves both an offer and a sale.
- Prior to the USA, individuals were able to give gifts of assessable stock without disclosing that additional capital (an assessment) was required in order to maintain ownership. Today, the Uniform Securities Act requires disclosure to be made to the recipient of the gift of assessable stock.
Other unusual situations that involve offers and/or sales include the following:
- Any security delivered w/ the purchase of a security (ex: an investor buys a bond w/ a warrant attached).
- The sale of a warrant or right is also considered an offer.
- The exercise of stock options and warrants is also considered a sale under USA
Actions that DO NOT involve an offer or a sale
- A pledge or loan of stock
- An exchange of securities due to merger, reorganization, or bankruptcy
- A stock dividend
True or false: Investors does not have to disclose that a stock is assessible when attempting to make a sale?
False
True or false: Adminstrators can suspend a registration, revoke a person’s registration, OR bar a registrant from association w/ a registered BD or IA?
True. Administrators can also limit activities of a registrant.
Administrators cannot levy fines or impose prison sentences directly
Reasons an administrator may take the actions listed in #11:
- A person filed an incomplete or false application for registration.
- The registrant willfully violated USA
- The registrant was convicted of a felony WITHIN THE PAST 10 YEARS
- Thr registrant has violated securities or commodities laws WITHIN THE PAST 10 YEARS
- The registrant has been suspended by a court from participation in securities business
- A different state’s Adminstrator has already denied, revoked, or suspended the registrant’s regiistration.
- The registrant is engaged in dishonest or unethical practices.
- The registrant is insolvent
- The registrant is not qualified due to LACK OF TRAINING, EXPERIENCE, AND KNOWLEDGE. (lack of experience alone is not enough for denial).
- The registrant has failed to reasonably supervise its employees to ensure compliance w/ USA
- The registrant has failed to pay a filing fee- this is lifted once the fee is paid
- The applicant and the employing broker-dealer or investment adviser must
be notified of the action, the reasons for the action, and the fact that a hearing will be scheduled within 15 days of the filing of a written request.
True or false: An Administrator may deny, suspend, revoke, cancel, or withdraw the registration of any registrant that has been subject to a foreign regulator’s disciplinary actions within the past 5 years?
True
True or false: The disqualification of an agent of a broker-dealer or of any employee of an investment adviser may not be used against the firm unless the employee’s disqualification is based on a lack of supervision. However, if the Administrator feels that it’s in the public interest, the disqualification of a director, officer, or partner (as distinct from an ordinary agent), may be the basis for a proceeding against the firm’s registration?
True
What is the process of legal proceedings after wrongdoing is determined?
The Administrator must give appropraite notice to the registrant, and also give an opportunity for a hearing, written findings of fact, and conclusions of law. After the hearing, the Administrator’s decision must be provided in writing and suported with legal reasoning and facts. An appeal w/ a state court is available if the registrant does it within 60 days.
