Punitive actions

The state administrator can take punitive actions against registered persons and issuers of registered securities in certain situations. These actions are typically tied to misconduct, legal violations, or unethical behavior. The administrator’s available punishments include:

• Denial of registration applications
• Suspension or revocation of registration status

Denial of registration applications

Registration of securities professionals and securities was the focus of the previous unit. One purpose of the registration process is to help the administrator keep “bad faith actors” and applicants with problematic histories out of the securities industry. That’s why the application requires many disclosures. Regulators want a complete picture of a person’s or issuer’s background before allowing them to engage with investors.

When a person or issuer submits registration paperwork, the state administrator has two options:

• Declare the registration effective if the required documents and fees are submitted and the applicant’s background is acceptable
• Deny registration and reject the application

To deny an application, two requirements must be met:

1. The denial must be in the public interest (it must benefit the general public).
2. At least one of the following circumstances must exist:

• An incomplete, false, or misleading application was submitted
• Any of the following occurred within the past 10 years:
  • Violation of a state or federal securities law
  • Any felony conviction
  • A securities-related misdemeanor conviction
• Enjoined by a court from engaging in the securities industry
• Is subject to regulatory action by another state administrator
• Engaging in dishonest or unethical practices
• Insolvency
• Violated a foreign securities law within the past 5 years
• Is not qualified due to lack of experience*, training, or knowledge
• Failure to supervise employees (broker-dealers and investment advisers only)
• Failure to pay appropriate filing fees

*Lack of experience alone is not a disqualifying factor, but a lack of training or knowledge alone (or in combination with a lack of experience) may result in disqualification.

The items above are the main issues a state administrator looks for when reviewing registration applications. Some applicants are just starting a business, while others are registering in a new state after operating elsewhere. That’s why a few items may seem odd for a business that isn’t operating yet (for example, failure to supervise employees).

For a denial order to take effect, the state administrator must ensure these requirements are met:

• Appropriate prior notice to the applicant
• Opportunity for hearing is provided
• Disclosure of written facts and findings of law

To satisfy the notice requirement, the denial notice is typically provided within 30 days of the application. (Effective registration generally occurs on the 30th day after filing if the required documents are submitted.) If denial is warranted based on one or more of the circumstances listed above, the administrator should notify the applicant before that 30-day period ends.

A hearing gives the applicant a chance to respond and present evidence. If an applicant believes the denial was unjustified, they have 60 days after receiving the denial notice to request a hearing. Unless all parties agree otherwise (the applicant, the administrator, and any other involved parties), hearings are public. After the hearing, the denial is either appealed or affirmed based on the evidence presented.

Once a final decision is reached, the state administrator must provide a written summary explaining the reason(s) for the denial (this is the disclosure of written facts and findings of law).

Suspension or revocation of registration

Effective registration doesn’t end regulatory oversight. Registrations are subject to annual renewal, and the state administrator continues to monitor activity in the securities markets. Broker-dealers and investment advisers must update the administrator when a material (significant) aspect of the business changes. In addition, agents and investment adviser representatives (IARs) must notify the administrator if a new event or circumstance puts their registration at risk.

There are two primary punitive actions the state administrator may take against a registered person:

• Suspension: temporarily removes registration, preventing the person from operating for a specified period (often weeks to months)
• Revocation: permanently removes registration

As with denial, suspensions and revocations may occur only if two requirements are met:

1. The action must be in the public interest.
2. At least one of the following circumstances must exist:

• Finding misleading or false information on the registration application*
• Any of the following occurred within the past 10 years:
  • Violation of a state or federal securities law
  • Any felony conviction
  • A securities-related misdemeanor conviction
• Enjoined by a court from engaging in the securities industry
• Is subject to regulatory action by another state administrator
• Engaging in dishonest or unethical practices
• Insolvency
• Violated a foreign securities law within the past 5 years
• Is not qualified due to lack of experience**, training, or knowledge
• Failure to supervise employees (broker-dealers and investment advisers only)
• Failure to pay appropriate filing fees (including renewal fees)

*The administrator may not take any punitive action against a registered person based on information that was known when effective registration was granted. However, suspension or revocation may occur if the information disclosed was found to be misleading or false after effective registration was granted.

*Lack of experience alone is not a disqualifying factor, but a lack of training or knowledge alone (or in combination with a lack of experience) may result in disqualification.

You’ll notice this list closely matches the denial list. The key difference is timing: the issue was either not properly disclosed at the time of application or it occurred after registration became effective.

Registered persons and issuers are responsible for notifying the administrator promptly if any of these events occur (for example, an agent being convicted of a felony). Failing to disclose the event can lead to more serious consequences.

*Promptly typically means as soon as possible, but no later than 30 days after the event.

As with denial, the state administrator must meet these three obligations for a suspension or revocation to take effect:

• Appropriate prior notice to the applicant
• Opportunity for hearing is provided
• Disclosure of written facts and findings of law

The structure is the same:

• Notice must be provided.
• The affected person may request a hearing within 60 days to appeal the decision.
• Once requested, the hearing must be scheduled within 15 days.
• A written summary explaining the reason(s) for the suspension or revocation must be provided.