The state administrator has many responsibilities related to supervising the securities markets and financial professionals. The Uniform Securities Act (USA) is enacted by lawmakers, and the administrator enforces the provisions in that law. The administrator can’t change the USA, but they do have discretion in how they interpret and enforce it. This is similar to police officers: they can’t change the law, but they have some flexibility in how they enforce it.
The administrator’s most important role is enforcing the anti-fraud provisions of the USA. Their primary function is protecting investors from being taken advantage of by financial professionals, issuers of securities, and even other investors. To do that, the USA gives the administrator these powers:
We covered the registration of persons and securities thoroughly in the previous unit. Registration gives the administrator a “gatekeeper” role. If the administrator can show that an action affecting a person’s registration status is in the public interest*, they have broad authority to keep that person out of the industry (temporarily or permanently).
*Any action taken against a person’s registration status must qualify as “in the interest of the public.” Technically, if it cannot be argued to benefit the public in some way, the administrator cannot deny, suspend, or revoke a registration.
If an applicant has a checkered past, their registration may be denied. That’s why the application process requires extensive disclosure: it helps prevent “bad faith actors” from entering the securities industry.
Once registration becomes effective, the administrator continues to monitor a registered person’s or issuer’s activities for compliance with securities laws and regulations. Certain events or conduct can put a person’s or security’s registration status at risk. If the issue is serious enough, registration can be suspended or revoked.
The specifics of denials, suspensions, and revocations are covered later in this unit.
If an agent or investment adviser representative’s (IAR’s) registration is suspended or revoked, it has no bearing on their firm’s registration. However, if a broker-dealer or investment adviser’s registration is revoked, all registrations of their employees become inactive. Remember: an agent or IAR must be associated with a broker-dealer or investment adviser to be properly registered. If the firm loses its registration, the representative can’t operate on that firm’s behalf. They may, however, associate with a different firm and then apply for registration.
Denials, suspensions, and revocations are punitive actions (punishments) the state administrator can take against an applicant or registered person. A person’s or security’s registration status can also be withdrawn or canceled, which typically isn’t punitive (covered in a future chapter). Bottom line: one of the administrator’s primary powers is managing registration, which determines which financial professionals and securities may interact with the investing public.
If the administrator has reason to believe an unethical or illegal action has occurred in their state, they have broad investigatory powers. In most cases, investigations begin with complaints and tips from the public. According to the North American Securities Administrators Association’s (NASAA’s) 2019 report, over 8,000 complaints were received by state administrators, which led to 5,320 investigations. Those investigations led to 1,640 enforcement actions.
This power has a few layers. Here’s the relevant language from the USA:
The administrator may conduct public or private investigations within or outside of this State that the administrator considers necessary or appropriate to determine whether any person has violated, is violating, or is about to violate [the USA]
An investigation may be:
Investigations may occur within or outside the administrator’s state, but the administrator must have jurisdiction. You’ve probably heard the term on shows like COPS. Police officers generally have jurisdiction only in the cities or states where they operate. If an illegal act occurs outside that area, they typically can’t prosecute or pursue legal action. The same concept applies to the state administrator.
The administrator has jurisdiction if a financial professional (registered person) and/or client was physically in their state during:
*Please visit the links above if you need a refresher on the legal definitions of offers and sales. The details are important!
We discussed federal covered advisers previously; as a refresher, these are typically larger advisers in terms of assets under management. The SEC primarily regulates these advisers, so can the state administrator investigate them? It depends. The state administrator may investigate a covered adviser only if they suspect the adviser is committing fraud in their state. Otherwise, the administrator has no authority over federal covered advisers beyond requiring a notice filing.
If jurisdiction exists, the administrator can investigate any registered person or issuer. An investigation may lead to punishment, such as a suspension or revocation, or it may lead to no action. It depends on what the administrator finds.
The administrator may require or permit a person to testify, file a statement, or produce a record, under oath or otherwise as the administrator determines, as to all the facts and circumstances concerning a matter to be investigated or about which an action or proceeding is to be commenced.
The administrator has subpoena power and can require a person to provide information on a given subject. However, the administrator may not violate a person’s 5th amendment right against self-incrimination. Under the immunity procedure, the administrator can’t force a person to testify if that testimony could result in criminal proceedings against them.
The administrator may publish information concerning an action, proceeding, or an investigation… if the administrator determines it is necessary or appropriate in the public interest and for the protection of investors.
The administrator may publicly disclose information about an investigation, but isn’t required to do so. If a punitive action is taken against a person or issuer, the results are usually made public.
Another key responsibility of the state administrator is interpreting and enforcing the USA. To support compliance, the administrator may issue rules, forms, orders, and notices.
Rules
A rule is issued when a legal provision needs clarification or further interpretation for all registered persons and related parties. Rules may be adopted across states through NASAA, or issued by a specific state administrator for that state only. For example, here’s an NASAA rule relating to investment advisory contracts. The USA addresses these contracts, but additional interpretation and detail were needed.
Orders
Orders are similar to rules, but they typically apply to a specific person or situation. For example, here’s an order from New Mexico’s administrator relating to single-agent broker-dealers in the age of COVID-19. The order doesn’t apply to all broker-dealers - only those with a single agent.
A unique type of order is a cease and desist order. These are common in many areas of law, including securities regulation. A cease and desist order is essentially a formal warning before legal action is pursued. If the administrator believes an unethical or illegal action may be occurring, they may issue a cease and desist as a “warning shot.” There’s no legal obligation to take further action, so it’s possible nothing follows - especially if the conduct stops.
If the administrator believes the conduct is continuing, they may petition a court for an injunction. If the judge agrees, the injunction legally requires the person to stop the activity. The administrator can’t issue an injunction directly, but they work closely with the legal system. While the administrator could suspend or revoke registration, they may still be investigating. Suspensions and revocations are typically imposed after an investigation is complete.
An injunction can help prevent further harm to investors in the short term. After the investigation is complete, the administrator could pursue several actions:
*All of these actions are discussed in detail later in this unit. Follow the links above for more information.
Forms
Forms are a major tool for making required disclosures. The administrator can create, change, or remove forms to help ensure registered persons comply with the USA. While the law requires certain disclosures, administrator-provided forms standardize how that information is submitted. These are the primary forms to know for the exam:
| Form | Use |
|---|---|
| Form BD | Broker-dealer registration form |
| Form ADV | Investment adviser registration form |
| Form ADV-E | Audit result form for advisers taking custody |
| Form ADV-W | Investment adviser registration withdrawal form |
| Form U4 | Agent & IAR registration form |
| Form U5 | Agent & IAR registration withdrawal form |
Notices
Notices are public statements acknowledging a situation or market condition. For example, here’s a notice from Colorado’s state administrator about their operations during the COVID-19 crisis. The notice explains that staff are primarily working from home, examinations are being performed remotely, and licensing (registration) applications continue to be processed normally.
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