Although the Securities and Exchange Commission (SEC) has broad regulatory power, the Series 65 tends to focus on the state administrator. This unit primarily covers enforcement under state rules and regulations. When a federal rule or regulation applies, it will be noted.
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 interpret and enforce it. A helpful comparison is a police officer: they don’t write the law, but they do have discretion in how they apply and enforce it.
The administrator’s most important role is enforcing the USA’s anti-fraud provisions. Their central job is to prevent 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 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, the administrator may deny registration. That’s why the application process requires extensive disclosure: it’s designed to keep bad-faith actors from entering the securities industry.
Once registration is effective, the administrator continues to supervise the activities of registered persons and issuers to ensure compliance with securities laws and regulations. Certain events or conduct can put a person’s (or a security’s) registration 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, that action doesn’t affect the firm’s registration. However, if a broker-dealer’s or investment adviser’s registration is revoked, all employee registrations become inactive. 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.
A representative may re-associate with a different firm and then apply for registration again.
Denials, suspensions, and revocations are punitive actions (punishments) the state administrator can take against an applicant or registered person. Registration can also be withdrawn or canceled, which typically isn’t punitive (covered in a future chapter). Bottom line: managing registration is one of the administrator’s core powers, and it directly affects which professionals and securities can 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 many cases, investigations begin with complaints and tips from the public. According to the North American Securities Administrators Association’s (NASAA’s) 2019 report, state administrators received over 8,000 complaints, which led to 5,320 investigations and 1,640 enforcement actions.
This power has several layers, so it helps to look at the USA’s language:
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 public (announced broadly) or private. It may occur within or outside the administrator’s state, but the administrator must have jurisdiction.
You’ve probably heard the term jurisdiction in police shows like COPS. Police officers generally have authority only within the city or state where they operate. If conduct occurs outside that area, they typically can’t prosecute it. 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 reminder, these are typically larger advisers based on assets under management. The SEC primarily regulates covered advisers, but a state administrator may investigate a covered adviser if the administrator suspects the adviser is committing fraud in that state. Otherwise, the administrator’s authority over a federal covered adviser is generally limited to 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 result in 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. 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 lead to 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. If a punitive action is taken against a person or issuer, the results are usually made public.
A key part of interpreting and enforcing the USA is issuing guidance and directives that support compliance. The administrator can do this through rules, forms, orders, and notices.
Rules
A rule is used 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 advisory contracts, but this topic needed additional detail.
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 during COVID-19. The order doesn’t apply to all broker-dealers - only those with one 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. If the administrator believes unethical or illegal activity may be occurring, they may issue a cease and desist as a warning. There’s no requirement that further action must follow, so it’s possible nothing happens after the order - especially if the conduct stops.
If the administrator believes the conduct is continuing, they may petition a court for an injunction. If granted, an injunction legally requires the person to stop the activity. The administrator can’t issue an injunction directly; that power belongs to the courts. The administrator may be investigating and may not yet be ready to suspend or revoke registration, since those actions are typically taken after an investigation is complete.
An injunction can help prevent further investor harm 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 support compliance with the USA. The law requires certain disclosures, and the forms help standardize how that information is provided. 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 about a situation or market condition. For example, here’s a notice from Colorado’s state administrator about 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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