Punitive actions

The state administrator has the power to exercise punitive actions against registered persons and issuers of registered securities in certain circumstances. These punishments are typically related to bad actions, breaking the law, or unethical practices. The punishments available to the administrator include:

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

Denial of registration applications

Registration of securities professionals and securities was the primary topic in the previous unit. This process empowers the administrator to prevent “bad faith actors” and those with checkered pasts from entering into the securities industry. That’s why a long list of disclosures are required to be made. The regulators are attempting to gain a full picture of a person’s or issuer’s background in order to determine if they’ll be allowed to engage investors.

When a person or issuer submits registration paperwork, the state administrator has two choices. They can deem the registration effective if all necessary documentation and fees are submitted and the applicant has an acceptable background. Or, they have the power to deny registration and reject the application.

In order to deny an application, two requirements must be met. First, the denial must be in the public interest, meaning the denial will somehow benefit the general public. Second, 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 a 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

*Registration cannot be suspended or revoked solely based on lack of experience (although it can be denied solely for a lack of training or knowledge). However, an application can be denied due to a combination of lack of experience plus lack of training and/or knowledge.

The list above includes the items a state administrator keeps an eye out for when reviewing registration applications. The applicant may be in the initial stages of starting their business, or may be applying in another state after already being in business. That’s why some of the items above may not seem like an issue for a business that isn’t operating yet (e.g. failure to supervise employees).

In order for a denial order to take effect, the state administrator must ensure the following requirements are met:

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

To fulfill the first requirement, a denial notice will typically be provided within 30 days of application. You may recall effective registration takes place on the 30th day after filing if all necessary documentation is submitted. If a denial is in order due to one or more of the circumstances listed above, the state administrator should notify the applicant before the 30-day window has elapsed.

Hearings provide the applicant an opportunity to defend themselves. Similar to the American justice system, the state administrator takes an ‘innocent until proven guilty’ stance. If an applicant feels they were denied for unjustified reasons, they have 60 days after the denial notification to request a hearing. Unless agreed to by all parties (the applicant, administrator, and any other related parties), hearings are public. The denial will either be appealed or affirmed based on the evidence presented at the hearing.

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

Suspension or revocation of registration

Gaining effective registration obviously isn’t the end of regulatory supervision for financial professionals and issuers. Not only are registrations subject to annual renewal, but the state administrator oversees activity in the securities markets. Broker-dealers and investment advisers must update the state administrator when a material (significant) aspect of their business changes. Additionally, agents and investment adviser representatives (IARs) are obligated to notify the state administrator if a new circumstance or event puts their registration status at risk.

There are two primary types of punitive actions (punishments) the state administrator may take against a registered person: suspension and revocation. Suspension temporarily removes a person’s registration, preventing them from operating in the industry for a specified period of time (typically several weeks to months). Revocation permanently removes a person’s registration, and is obviously the more serious of the two.

Similar to denial of registration, suspensions and revocations may only occur if two requirements are met. First, the punitive action must be in the public interest, meaning the suspension or revocation will somehow benefit the general public. Second, one of the following circumstances must exist:

• Finding misleading or false information on 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 a 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.

**Registration cannot be suspended or revoked solely based on lack of experience (although it can be denied solely for a lack of training or knowledge). However, an application can be denied due to a combination of lack of experience plus lack of training and/or knowledge.

As you probably noticed, the list above is virtually identical to the list we discussed with application denial. The difference is these actions were either hidden at the time of the application or occurred while the person and/or security was registered. It’s the responsibility of registered persons and issuers to promptly* notify the administrator if any of the circumstances above occur (e.g. an agent being convicted of a felony). It’s never a good idea to hide this information - they’ll almost always find out one way or another, and the punishment will likely be worse! From there, the state administrator will decide on the appropriate action to be taken.

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

Another similarity with denial - the state administrator must fulfill 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 same exact structure exists with each obligation. Appropriate notice must be provided. The affected person may request for a hearing to appeal the decision within 60 days. The hearing must be scheduled within 15 days once requested. Additionally, a written summary of the reason(s) for suspension or revocation must be provided.