Punitive actions

The state administrator has the power to 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 primary topic in the previous unit. This process gives the administrator a way to keep “bad faith actors” and applicants with problematic histories out of the securities industry. That’s why applicants must make many disclosures. Regulators want a complete picture of a person’s or issuer’s background before allowing them to work 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. 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

*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.

These are the issues a state administrator looks for when reviewing registration applications. An applicant might be starting a new business or registering in a new state after operating elsewhere. That’s why some items may seem unrelated to a business that hasn’t begun operating yet (for example, failure to supervise employees).

For a denial order to take effect, the state administrator must ensure all of the following occur:

• 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 sent within 30 days of the application. (Effective registration generally occurs on the 30th day after filing if all required documents are submitted.) If denial is warranted based on one or more of the circumstances above, the administrator should notify the applicant before that 30-day window 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 everyone involved agrees otherwise (the applicant, the administrator, and any other related parties), hearings are public. After the hearing, the denial will be appealed or affirmed based on the evidence presented.

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

Suspension or revocation of registration

Effective registration isn’t the end of regulatory oversight for financial professionals and issuers. Registrations must be renewed annually, 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 and revocation.

• A suspension temporarily removes a person’s registration, preventing them from operating in the industry for a specified period (often weeks to months).
• A revocation permanently removes a person’s registration and is more serious.

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

1. The action must be in the public interest.
2. 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 is found to be misleading or false after effective registration is 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.

You’ll notice this list is almost identical to the denial list. The key difference is timing: for suspension or revocation, 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). The administrator then decides what action, if any, is appropriate.

*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 requirements 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:

• Appropriate 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.
• The administrator must provide a written summary of the reason(s) for the suspension or revocation.