Civil and Criminal Penalties Under State Securities Law on the Series 63

The Uniform Securities Act gives state securities regulators significant enforcement tools. Understanding what penalties apply to which violations, who can bring enforcement actions, and what rights investors have is a reliable source of Series 63 questions. This post walks through every enforcement mechanism you need, with the specific numbers and conditions the exam tests.

The Enforcement Structure

The USA creates three categories of enforcement:

1. Administrative remedies: Actions taken by the state Administrator
2. Civil liability: Lawsuits brought by private investors
3. Criminal penalties: Prosecution by state or federal authorities

Each category has its own rules, limitations, and conditions. A single violation can trigger enforcement in all three categories simultaneously.

Administrative Remedies

The state securities Administrator (the state regulator) has broad authority to investigate, issue orders, and impose sanctions.

Denial, Suspension, and Revocation of Registration

The Administrator can deny, suspend, or revoke the registration of:

• Securities (preventing them from being offered in the state)
• Broker-dealers and investment advisers (preventing them from doing business in the state)
• Agents and investment adviser representatives (preventing individuals from working in the securities industry in the state)

Grounds for denial, suspension, or revocation include:

• Filing false or misleading information in registration documents
• Willful violations of the USA or federal securities law
• Criminal conviction involving securities or moral turpitude within the past 10 years
• Injunctions or orders from other regulators
• Insolvency
• Unethical or dishonest practices

The Administrator cannot revoke registration arbitrarily. There must be grounds, and the affected party has the right to a hearing. The exam tests whether the Administrator acted within proper procedure.

Cease and Desist Orders

The Administrator can issue a cease and desist order requiring a person to stop a specific activity while an investigation is underway. A cease and desist does not require a hearing before it is issued (unlike revocation), but the affected party can request one afterward.

Summary Orders

In emergency situations, the Administrator can issue a summary suspension of registration or a summary stop order on a securities offering without prior notice or hearing. Again, a hearing must be made available promptly after the summary action.

Criminal Penalties

The USA authorizes criminal prosecution for willful violations. The specific criminal penalty provisions are:

Maximum imprisonment: 3 years per violation

Maximum fine: $5,000 per violation (note: many states have increased these amounts, but the traditional USA numbers are what the Series 63 tests)

Criminal prosecution requires willfulness. A person who violates the USA inadvertently is not subject to criminal charges. However, the definition of "willful" is not limited to knowing the specific law was being violated. Deliberately engaging in conduct that turns out to violate the USA can be willful even if the person did not know the specific legal rule.

Prosecution can come from the state (under state law) or from the federal government (under federal securities law, which has its own, often higher, penalties). State and federal prosecutions can proceed simultaneously without violating double jeopardy protections because they are separate sovereign governments.

Statute of limitations for criminal prosecution: Typically 5 years from the date of the violation.

Civil Liability: Investor Remedies

The USA gives private investors the right to sue for damages when securities are sold in violation of the Act. The civil remedy provisions are designed to make investors whole.

What Investors Can Recover

An investor who purchases a security in violation of the USA can sue for:

• Rescission: Return of the purchase price paid, plus interest (typically at the legal rate from the date of purchase), minus any income received from the security (dividends or interest payments while the investor held it)

If the investor no longer owns the security (they sold it at a loss), they can sue for:

• The difference between the purchase price and the sale price, plus interest, minus any income received

The Statute of Limitations for Civil Suits

The civil statute of limitations under the USA has two components:

• Three years from the date of the transaction, OR
• Two years from the date the violation was discovered or should have been discovered through reasonable diligence

Whichever period runs out first cuts off the right to sue.

This is a frequently tested calculation on the Series 63. A violation occurs in January 2020. The investor discovers it in March 2022. Three years from the transaction would be January 2023. Two years from discovery would be March 2024. The three-year period expires first, so the investor must sue by January 2023.

Seller's Right to Cure: Bona Fide Offer to Rescind

A seller who has sold a security in violation of the USA can cut off civil liability by making a bona fide offer to rescind. The seller must offer to take back the security and refund the purchase price plus interest. If the buyer refuses this offer, the buyer loses the right to sue.

This cure mechanism is important for the exam. The seller cannot escape liability by offering partial payment or by offering something other than full rescission. The offer must be genuine and complete.

Persons Liable

Under the USA, liability for civil violations extends beyond the direct seller. The following may be jointly and severally liable:

• The seller of the securities
• Every person who materially aided in the sale
• Every partner, officer, or director of the selling entity who had knowledge of or participated in the violation

However, controlling persons can escape liability if they prove they had no actual knowledge of the violation and could not reasonably have known about it.

Waiver of Rights

The USA prohibits waivers of rights under the Act. A provision in a contract that purports to waive an investor's rights under the USA is void. This means an issuer or seller cannot contractually limit an investor's right to sue under the Act, even if the investor agrees in writing.

The exam tests this with scenarios where a seller adds language to a sales agreement attempting to limit liability. Such provisions have no legal effect under the USA.

The Administrator's Role in Civil Actions

The Administrator cannot bring civil suits on behalf of investors (that right belongs to investors themselves). The Administrator's enforcement tools are administrative (denial, suspension, revocation) and criminal referral (to the state attorney general or prosecutor).

Investors bring their own civil suits. The Administrator can, however, seek injunctions in court to stop ongoing violations. An injunction is a court order requiring a party to stop certain conduct.

Summary: Numbers to Know Cold

• Criminal imprisonment: up to 3 years per violation
• Criminal fine: up to $5,000 per violation
• Civil statute of limitations: 3 years from transaction or 2 years from discovery, whichever is shorter
• Criminal statute of limitations: typically 5 years from violation

These four numbers are tested on essentially every Series 63 exam. Write them on a notecard and know them without hesitation before your test date.