Remedies and administrative provisions chapter recap

Ch 4-5 Exam Essentials — Remedies and Administrative Provisions

Administrator's office (USA §406, §413). Senior securities regulator in each state. Adopts rules, registers BDs/agents/IAs/IARs/securities, investigates violations, takes administrative action, refers criminal matters. Cannot arrest, prosecute, impose criminal penalties, or issue injunctions.

Investigations (USA §407). Subpoena power for witnesses (ad testificandum) and documents (duces tecum). Depositions, examinations, document requests. Cooperation across state lines.

Cease-and-desist (USA §408). Issued against any person violating the USA. Effective on issuance, subject to notice and hearing rights. Violation = separate USA violation.

Administrative action process (USA §204). Prior written notice + opportunity for hearing + written findings of fact and conclusions (an ordinary order under §204(f)); a summary order may issue immediately, with a hearing set within 15 days of request of law.

Summary orders. Issued without prior notice when immediate action protects investors. Hearing must follow promptly upon request.

Civil right of action (USA §410). Buyer sues seller and controlling persons (joint & several) for selling unregistered/non-exempt securities, using an unregistered BD/agent, or selling via material misstatement or omission. Scienter NOT required for civil liability.

Rescission formula. Purchase price + interest from purchase date − income received. Buyer tenders the security.

Damages formula. Same as rescission, minus sale proceeds, when buyer no longer owns the security. No tender required.

Rescission offer (USA §410(g)). Seller writes offer with rescission terms. Buyer has 30 days to accept. Acceptance → sale unwound and liability extinguished. Rejection or no response → buyer waives right of action.

Successor and control person liability (USA §410(c)). Joint and several with direct seller for: controlling persons, partners/officers/directors, employees materially aiding the sale, participating BDs and agents. Reasonable-care defense available.

Civil statute of limitations. 3 years of the sale OR 2 years after discovery, whichever comes first. The buyer loses on whichever clock expires first.

Criminal penalties (USA §409). Up to $5,000 fine + 3 years imprisonment per willful violation. 5-year statute of limitations. "No knowledge of rule or order" defense available for rules/orders only, not statutes. State prosecutor brings the case — administrator refers.

Jurisdiction (USA §414). State has jurisdiction if offer made in state, offer accepted in state, OR acceptance made in state. Out-of-state newspapers/broadcasts and limited internet offers can fall outside.

Judicial review (USA §411). Final orders reviewed by state court on the administrative record. Substantial-evidence standard for facts, de novo for law, abuse-of-discretion for discretionary calls. Petition due within 60 days of the final order; filing does NOT automatically stay the order.

Remedies-and-administrative exam traps — consolidated

1. "The administrator can issue an injunction." Wrong. Injunctions are judicial. Administrator must seek injunctive relief through a court filing.
2. "The administrator can impose criminal fines." Wrong. Only courts impose criminal penalties. The administrator can impose administrative sanctions and refer for prosecution.
3. "A summary order can be issued and never followed up." Wrong. A prompt follow-up hearing is required. Failure to provide it can invalidate the order.
4. "Civil liability requires the buyer to prove the seller knew it was illegal." Wrong. USA §410 does not require scienter. Even an innocent or negligent violation triggers civil liability.
5. "Rescission means the buyer gets a refund and keeps the security." Wrong. The buyer must tender the security back. Without tender, the remedy is damages, not rescission.
6. "A rescission offer that the buyer ignores doesn't extinguish liability." Wrong. If the buyer does not accept within 30 days, the §410 right of action is waived.
7. "Control persons can avoid liability by not signing the offering documents." Wrong. Liability attaches to the status of control regardless of signature. The reasonable-care defense is the actual escape route — lack of knowledge that could not have been discovered with reasonable care.
8. "The civil statute of limitations is whichever is later, 3 years or 2 years of discovery." Wrong. It is whichever is earlier. The buyer can lose the right to sue 3 years after sale even if they only just discovered.
9. "Willful means the defendant knew the act was illegal." Wrong. Willful means the act was deliberate. Knowledge that the act was illegal is not required.
10. "State jurisdiction requires the buyer and seller to both be in the state." Wrong. Any one of three triggers is sufficient: offer made in state, offer accepted in state, or acceptance made in state.
11. "Judicial review automatically stays the administrator's order." Wrong. No automatic stay. The petitioner must specifically request a stay from the reviewing court.
12. "The 'no knowledge of the rule' defense covers all USA criminal charges." Wrong. The defense covers violations of rules and orders — not statutory provisions of the USA itself.