Tuesday, February 9, 2010

The Administrator

The Series 65 and Series 66 are obsessed with the Uniform Securities Act. You will see tons of questions about securities registration and registration/exemptions for agents, advisers, etc. You will also see challenging questions about what the Administrator can and can't do, or what he would or would not do given various made-up little scenarios. For example, the following question should look pretty similar to something you'll see on your exam:

Under the Uniform Securities Act, the Administrator may bring an action in a court of law to force an agent to
A. resign from the firm
B. retake his exam
C. return money to a client
D. none of the choices listed

EXPLANATION: the true bad boys in the business often blow off Administrative orders, which are outside the realm of criminal complaints. For example, Chrisopher Maltasanti might not become overly concerned about the New Jersey Bureau of Securities' little "cease and desist order," even if he would probably quake in his boots over an arrest warrant from the FBI. So, if somebody is thumbing his nose at the Administrator, the Administrator can bring an action in court to request that the judge help to get the person's attention. The judge, if persuaded that it's necessary and in the public interest, can then issue a court order designed to convince the person breaking the rules to comply with the Administrator's cease & desist order. The Uniform Securities Act says [verbatim] "upon a proper showing by the [Administrator] the court may enter an order of rescission, restitution or disgorgement directed to any person who has engaged in any act constituting a violation of any provision of this act, or any rule or order hereunder." The "rescission, restitution or disgorgement" tells us that the answer is "C." To illustrate how this might play out, let's say that an unregistered adviser engages in some self-dealing in which he charges clients "management fees" in order to put them into "securities" of various deadbeat companies he owns, and no disclosure is provided that he owns the companies or how much debt they've accumulated with no hope of profits, and all clients lose big money. Happens all the time, believe it or not. And when it happens, the Administrator could file a civil action asking the court to issue an order that forces the shady guy to give back his advisory fees and give the clients their original money plus interest. The fact that the guy will NEVER be granted a securities registration of ANY kind is a foregone conclusion, by the way.

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