NASAA Series 63 — All Questions

Four years ago, after notice and a hearing, the securities administrator of another state found that an applicant had willfully violated that state's securities law. The applicant now seeks registration here. How is that finding treated?

• a.It is not a ground, because an out-of-state finding counts only if a federal court has confirmed it
• b.It is a ground only if the other state also suspended or revoked the applicant's registration there
• c.It is a ground for denial, because an adjudication by another state's administrator within the past ten years counts✓
• d.It is not a ground, because only orders entered by this state's own Administrator can support a denial

A willful-violation determination made after notice and opportunity for hearing by another state's securities administrator, within the past 10 years, is a listed ground, whether or not any registration action followed. The same-state-order ground is a separate clause. Nothing requires a federal court to confirm the other state's finding.Uniform Securities Act (1956, as amended by NASAA) §204(a)(2)(F)

Six years ago a foreign securities regulator revoked an applicant's right to act as a securities agent in that country. Standing alone, can that revocation support a denial here?

• a.No, a foreign regulator's action can never support a denial because only United States regulators count
• b.No, a foreign regulator's action counts only if it was taken within the past five years✓
• c.Yes, a foreign revocation counts for ten years, the period for another state's adjudication
• d.Yes, if the applicant has not been registered with that regulator since the revocation

A foreign regulator's action denying, revoking or suspending the right to engage in the securities business is a ground only within the past five years, and the ten-year period belongs to other clauses. Foreign actions do count when timely, so they are not excluded. Later registration abroad is not part of the test.Uniform Securities Act (1956, as amended by NASAA) §204(a)(2)(H.1)

An agent of a broker-dealer violates the Act. The firm had written procedures and a supervisor, and it acted on the first complaint. May the Administrator suspend the firm's registration solely because its agent violated the Act?

• a.Yes, because a firm answers for every violation committed by its agents under the Act
• b.No, the Administrator may proceed only against the agent's own registration, never against the firm
• c.Yes, but only if the agent is an officer, director or partner who also holds a stake in the firm
• d.No, the firm is reachable on that basis only if it failed reasonably to supervise the agent✓

The firm's registration may be reached through its agent's conduct only on a finding that it failed reasonably to supervise, together with a public-interest finding. Vicarious liability for every agent violation is not the rule. The statement that only the agent can be sanctioned is also wrong, since the supervision clause lets the Administrator proceed against the firm when supervision fails.Uniform Securities Act (1956, as amended by NASAA) §204(a)(2)(J)

When applying, an agent disclosed a final, unstayed order against her from another state's administrator, and the Administrator registered her on January 5. Relying solely on that disclosed order, by when must a suspension or revocation proceeding begin?

• a.Within one year after registration, the same period that governs a proceeding begun after a registrant has withdrawn
• b.Within thirty days after the Administrator receives the application disclosing the order
• c.At any time, since a final order from another state is a ground for revocation
• d.Within ninety days following registration; a disclosed order cannot serve later as the sole basis✓

The Administrator may not start a suspension or revocation proceeding solely on a final order the applicant made known before the registration took effect unless it does so within ninety days after registration. The one-year period applies to proceedings begun after a withdrawal, and the clock runs from registration, not from the filing date. A final order from another state is a ground for action only within that limit, which does not apply to renewals.Uniform Securities Act (1956) §204(a), final paragraph (90-day limit on proceedings based on a disclosed final order)

The Administrator summarily suspends an agent's registration pending a final determination. The agent's written request for a hearing is received on June 10. By what date must the matter be set down for hearing?

• a.June 25, which is fifteen days after the request is received✓
• b.June 17, which is seven days after the written request is received
• c.July 10, which is thirty days after the request is received
• d.June 20, which is ten days after the Administrator receives the request

A summary order must tell the registrant that, within fifteen days after receipt of a written request, the matter will be set down for hearing. Fifteen days from June 10 is June 25. The seven-day, ten-day and thirty-day periods do not appear in this provision.Uniform Securities Act (1956, as amended by NASAA) §204(c)

The Administrator plans to revoke an agent's registration after finding grounds, and no summary order is involved. Which procedure must precede a final revocation order?

• a.Prior notice to the agent and the employer, a hearing opportunity, and written findings of fact and conclusions of law✓
• b.Prior notice to the agent only, a hearing if the agent asks for one, and an oral summary of the findings
• c.A hearing before the Administrator, followed by written approval of the revocation from the attorney general
• d.Prior notice to the agent, with a hearing and written findings required only if the agent appeals the order

Apart from a summary postponement or suspension, no order may be entered without appropriate prior notice (to the employer or prospective employer as well, for an agent), opportunity for hearing, and written findings of fact and conclusions of law. The findings are not triggered by an appeal. Approval by the attorney general is not part of the process.Uniform Securities Act (1956, as amended by NASAA) §204(f)

A broker-dealer's application to withdraw is received on March 10. No revocation or suspension proceeding is pending, and none is begun afterwards. On what date does the withdrawal take effect?

• a.March 11, because a withdrawal is effective on the next business day automatically
• b.May 9, because the Administrator has sixty days to review the withdrawal application
• c.April 9, thirty days after receipt, unless the Administrator sets a shorter period✓
• d.March 25, because withdrawal becomes effective fifteen days after receipt

Withdrawal becomes effective thirty days after the application is received, or sooner if the Administrator so determines, unless a proceeding is pending or begun within the thirty days. Thirty days from March 10 is April 9. The fifteen-day, sixty-day and next-day periods have no basis in the section.Uniform Securities Act (1956, as amended by NASAA) §204(e)

An agent's withdrawal became effective with no proceeding pending. Seven months later the Administrator learns the agent had willfully violated the Act while registered. What may the Administrator do?

• a.Nothing, because the Administrator loses all authority over a registrant once the withdrawal takes effect
• b.Institute a proceeding for any violation, willful or not, within five years after the withdrawal
• c.Institute a revocation or suspension proceeding within one year after the withdrawal became effective✓
• d.Institute a proceeding only within thirty days after the withdrawal became effective

After an automatic withdrawal, the Administrator may still begin a revocation or suspension proceeding within one year, on the willful-violation ground, and enter the order as of the last date the registration was effective. The thirty-day period governs whether the withdrawal becomes effective at all. A non-willful violation is not a ground for the late proceeding.Uniform Securities Act (1956, as amended by NASAA) §204(e)

The Administrator hears that a promoter is about to sell unregistered securities by phone to residents from an office in another state. How far does the Administrator's investigative power extend?

• a.Publicly or privately, inside or outside the state, and without any prior complaint✓
• b.Only within this state, and it must rely on other states for any conduct occurring elsewhere
• c.Privately only, because a public inquiry of the promoter requires a prior court order
• d.Only after a customer files a sworn written complaint about the promoter with the office

The Administrator may make public or private investigations within or outside the state as deemed necessary to determine whether anyone has violated or is about to violate the Act. No complaint is required, and no court order is needed for a public investigation. A promoter's location in another state does not remove the power to investigate.Uniform Securities Act (1956, as amended by NASAA) §407(a)

A witness served with an Administrator's subpoena for books and records refuses to appear. How may the Administrator enforce the subpoena?

• a.Close the investigation, since subpoenas under the Act bind only persons who have consented to them
• b.Direct a state officer to detain the witness until the witness produces the requested records for inspection
• c.Apply to the court for an order of compliance; disobeying that order is punishable as contempt✓
• d.Fine the witness in an order of the Administrator that is enforceable like a court judgment

On contumacy or refusal to obey a subpoena, the Administrator applies to the appropriate court, which may order the person to appear and produce evidence, with contempt as the sanction for disobeying the court. The Administrator has no power to detain a witness or to fine one by order. The subpoena binds without consent.Uniform Securities Act (1956, as amended by NASAA) §407(b), (c)

An agent being questioned in an investigation claims the privilege against self-incrimination. What result follows under the Act?

• a.The agent may decline, because testimony that may incriminate is excused under the Act
• b.The agent must testify and is then immune from every prosecution, including perjury committed in testifying
• c.The agent must still testify, but may not be prosecuted for the matter, except for perjury or contempt✓
• d.The agent must testify, and the testimony may later be used against the agent in a criminal prosecution

No one is excused from testifying or producing records because the evidence may incriminate, but an individual compelled after claiming the privilege cannot be prosecuted or penalized on account of the matter. The immunity does not shield perjury or contempt committed in the testimony. The Act does not allow the testimony to be used for a prosecution of the underlying conduct.Uniform Securities Act (1956, as amended by NASAA) §407(d)

An unregistered promoter is selling securities in this state while an investor complaint is pending. The Administrator wants the activity halted at once. What may the Administrator do under the Act's prohibitory-order provision?

• a.Issue a cease and desist order with or without a hearing, and may also seek an injunction in court✓
• b.Issue a cease and desist order only after the promoter has been convicted of willfully violating the Act
• c.Issue a cease and desist order only after a hearing, never alongside an injunction action
• d.Seek an injunction only, since a cease and desist order requires a court's prior approval to take effect

The Administrator may issue a cease and desist order with or without a prior hearing, or bring an injunction action, or both. A prior hearing is not required and a conviction is not a precondition. The order is administrative, so no court approval is required.Uniform Securities Act (1956, as amended by NASAA) §408(a)

The Administrator sues in court to enjoin a firm from continuing violations and asks for a temporary restraining order. The firm demands that the Administrator post a bond. How should the court rule?

• a.A bond may be required for a restraining order, but not for an injunction
• b.The court may not require the Administrator to post any bond✓
• c.The court must require a $5,000 bond, matching the Act's maximum fine
• d.The court must require a bond equal to the value of securities sold

In an injunction action brought by the Administrator, the court may not require the Administrator to post a bond. The $5,000 figure is the criminal fine ceiling and has no bearing on a bond. A permanent or temporary order carries no bond requirement.Uniform Securities Act (1956, as amended by NASAA) §408(b)

A court convicts an agent of willfully violating a provision of the Act other than §404. What is the maximum criminal penalty the section allows?

• a.A fine of up to $1,000 or imprisonment of up to one year, but the court may not impose both
• b.A fine of up to $5,000, imprisonment of up to three years, or both penalties✓
• c.A fine of up to $10,000, with no imprisonment available for a first offense under the Act
• d.Imprisonment of up to three years but no fine, because the section does not allow both

A willful violation is punishable on conviction by a fine up to $5,000, imprisonment up to three years, or both. Fine and imprisonment may be imposed together, so a no-fine rule is wrong. No minimum term exists, and the $1,000, one-year and $10,000 figures belong to no provision of the Act.Uniform Securities Act (1956, as amended by NASAA) §409(a)

An agent is convicted of willfully violating an Administrator's rule. At trial the agent proves that he had no knowledge of the rule. What is the effect of that proof?

• a.He cannot be imprisoned for the rule violation, though he may still be convicted and fined✓
• b.He may not be convicted at all, because knowledge of the rule is an element of every offense
• c.He may be imprisoned only if the Administrator had personally served the rule on him beforehand
• d.He may be imprisoned, because everyone is presumed conclusively to know the Administrator's rules

The Act provides that no person may be imprisoned for violating a rule or order if he proves that he had no knowledge of it. This protects only against imprisonment for a rule or order violation. It does not create a presumption of knowledge, and personal service is not what the section turns on.Uniform Securities Act (1956, as amended by NASAA) §409(a)

A buyer paid $40,000 for a security sold in violation of §301 and still owns it. She has received $2,000 of income on it. Before interest, costs and fees, what amount does the buyer recover on tender?

• a.$38,000, the $40,000 consideration less the $2,000 income received✓
• b.$2,000, because only income can be recovered when the security is returned
• c.$42,000, because income received is added back into the refund amount
• d.$40,000, because income already received by the buyer is hers to keep

On tender of the security, the buyer recovers the consideration paid plus interest, costs and attorneys' fees, less any income received. That gives $40,000 minus $2,000. Income is a deduction, not a bonus, and the buyer recovers the price, not just the income.Uniform Securities Act (1956, as amended by NASAA) §410(a)

A buyer paid $30,000 for a security sold by means of a material misstatement, and received $1,000 of income. She later sold it for $18,000, its value at that time. Before interest, what are her damages?

• a.$13,000, the price paid plus the income, less the value at disposal
• b.$11,000, the $29,000 tender amount less the $18,000 value✓
• c.$18,000, the amount for which the buyer later sold the security
• d.$12,000, the price paid less the value at the time of disposal

A buyer who no longer owns the security recovers the amount recoverable on tender, here $30,000 less $1,000 of income, minus the value when she disposed of it, plus interest from the date of disposition. The result is $29,000 minus $18,000. Ignoring the income gives $12,000, and adding it back gives $13,000.Uniform Securities Act (1956, as amended by NASAA) §410(a)

A buyer sues for rescission, alleging the seller omitted a material fact that made the sales presentation misleading. The buyer did not know of the omission. Which defense is available to the seller?

• a.The seller may escape liability by showing that the buyer never relied on the presentation in deciding to buy
• b.The seller may escape liability if the buyer fails to prove that the seller intended to deceive him
• c.The seller is strictly liable, because no defense is available once a material omission has been shown
• d.The seller may escape liability by proving he did not know, and with reasonable care could not have known, of the omission✓

For a misstatement or omission claim, the buyer must not have known of the problem, and the seller bears the burden of proving he did not know and could not have known with reasonable care. The buyer need not prove reliance or intent to deceive. The seller is therefore not strictly liable either.Uniform Securities Act (1956, as amended by NASAA) §410(a)

A salesperson sells securities by misstatements and is liable to the buyers. The firm's president did not take part in the sales and did not know of them. Is the president liable under the Act?

• a.No, unless the buyers first prove she personally directed the salesperson to make them
• b.Yes, jointly and severally, unless she proves she did not know and could not have known✓
• c.Yes, automatically, because a person controlling a liable person has no defense available
• d.No, because only the person who personally made the sales to the buyers can be held liable

Persons who control a liable person, including officers and directors, are jointly and severally liable to the same extent unless they prove they did not know and could not have known with reasonable care. The burden is on the president, not the buyers. Control liability is not limited to the direct seller, and it is not automatic.Uniform Securities Act (1956, as amended by NASAA) §410(c)

A buyer's contract of sale was made on March 1, 2021, and she discovered the untrue statement on January 15, 2023. What is the last date she may sue under §410?

• a.March 1, 2024, the earlier of the two statutory deadlines✓
• b.January 15, 2026, three years after she discovered the violation
• c.March 1, 2026, five years after the contract of sale was made
• d.January 15, 2025, two years after she discovered the violation

Suit must be brought within three years after the contract of sale, or within two years after discovery of the facts, whichever expires first. Three years from March 1, 2021 is March 1, 2024, and two years from discovery is January 15, 2025. The earlier date controls, and no five-year or three-years-from-discovery period applies.Uniform Securities Act (1956, as amended by NASAA) §410(f)

A buyer sold her security last year. She now receives a written offer to refund the price paid plus interest, less income received, does nothing for 45 days, and sues under §410. What is the result?

• a.She is barred only if she accepted the offer in writing within sixty days of receiving it
• b.She may sue, because silence is treated as a rejection of a refund offer by a former owner
• c.She may sue, but her recovery is reduced by the interest that the offer would have paid
• d.She is barred, because a former owner must reject such an offer in writing within thirty days✓

A buyer who no longer owns the security is barred from suing unless she rejected the written refund offer in writing within thirty days of receiving it, so that the seller knows where it stands. Silence therefore does not preserve the claim. The sixty-day period and the reduced recovery have no basis in the section.Uniform Securities Act (1956, as amended by NASAA) §410(g)

A subscription agreement signed by an investor says he waives all rights under the state securities act in connection with the purchase. The waiver is initialed and printed in bold type. How is it treated?

• a.It is valid as to civil liability, but it cannot waive the Administrator's powers
• b.It is void, and the investor keeps every right and remedy the Act provides✓
• c.It is valid, because it was initialed and conspicuous, so the investor gave up his rights
• d.It is valid if the investor is financially sophisticated enough to judge the offering

Any condition, stipulation or provision binding a buyer or advice recipient to waive compliance with the Act or a rule or order is void. Conspicuous formatting, initials or sophistication do not change that, and the Act makes no exception for civil liability.Uniform Securities Act (1956, as amended by NASAA) §410(i)

An aggrieved registrant wants judicial review of a final order entered on April 3. What is the last day to file a written petition with the court?

• a.June 2, which is sixty days after the order was entered✓
• b.May 3, which is thirty days from the order's entry
• c.April 18, which is fifteen days after the order was mailed
• d.July 2, which is ninety days after the Administrator signed it

A person aggrieved by a final order may petition for review by filing in court within sixty days after the order is entered. Sixty days from April 3 is June 2. The other dates reflect thirty, ninety or fifteen days, none of which the section uses.Uniform Securities Act (1956, as amended by NASAA) §411(a)

A registrant whose registration was revoked files a timely petition for judicial review. Meanwhile the registrant keeps operating. What is the effect of the petition on the Administrator's order?

• a.It stays only the revocation, leaving any cease and desist provisions in effect
• b.It stays the order for sixty days, after which the court must rule or lift it
• c.It automatically stays the order until the court rules on the petition
• d.It does not stay the order, unless the court specifically orders a stay✓

Starting a review proceeding does not operate as a stay of the Administrator's order unless the court specifically orders one. An automatic stay would make orders ineffective during litigation. No sixty-day stay exists, and the section draws no distinction between kinds of relief.Uniform Securities Act (1956, as amended by NASAA) §411(b)

An investment adviser in this state advises a client residing in another state. The advice is prepared and mailed from this state and is fraudulent. Does the Act's advisory antifraud provision reach the conduct?

• a.No, because the advisory antifraud provision applies only to clients who reside in this state
• b.Yes, since an act instrumental to the conduct was done here, wherever the parties are✓
• c.No, because the Act reaches only offers that are made to buyers and accepted within this state
• d.Yes, but only if the client is also registered with the home-state administrator

The investment adviser provisions apply when any act instrumental in effecting the prohibited conduct is done in this state, even if neither party is present here. The offer-and-acceptance tests govern the sale and purchase provisions, not these. Client registration elsewhere is irrelevant.Uniform Securities Act (1956, as amended by NASAA) §414(f)

An applicant for registration files an irrevocable consent appointing the Administrator to receive service of process. What does that consent cover?

• a.The consent lapses when the registration is withdrawn, so later suits must be served on the registrant
• b.Service is effective once a copy is left at the Administrator's office, with no mailing required
• c.Non-criminal suits arising under the Act; service is effective only with registered-mail notice afterward✓
• d.Criminal and non-criminal proceedings, so that a prosecution may be served on the Administrator

The consent covers non-criminal suits, actions and proceedings arising under the Act, and service on the Administrator is effective only if the plaintiff forthwith mails notice and a copy by registered mail to the defendant's last address on file and files an affidavit of compliance. Criminal proceedings are excluded, and the consent is irrevocable and applies to later actions.Uniform Securities Act (1956, as amended by NASAA) §414(g)

A customer of a SIPC member firm has two accounts: an individual account holding $620,000 of stocks and a joint account with her spouse holding $410,000 of stocks. The firm fails and none of the securities can be located. What is the most SIPC can restore across the two accounts?

• a.$910,000✓
• b.$1,030,000
• c.$500,000
• d.$750,000

The individual account and the joint account are different capacities, so each is tested against its own limit: the individual account is protected up to $500,000 of its $620,000, and the joint account is protected in full at $410,000, for $910,000. Treating all accounts as one pool yields $500,000, which wrongly merges separate capacities. The full $1,030,000 ignores the $500,000 cap on the individual account. $750,000 mixes up the $250,000 cash sub-limit with the overall limit.Securities Investor Protection Act, 15 U.S.C. 78fff-3(a)

One individual brokerage account at a SIPC member holds $330,000 in cash awaiting investment plus securities worth $140,000. The firm fails and all of the assets are missing. What is the most SIPC can restore for this account?

• a.$390,000✓
• b.$500,000
• c.$250,000
• d.$470,000

SIPC protects up to $500,000 per separate capacity, but no more than $250,000 of that may be cash. Cash is therefore limited to $250,000, and the $140,000 of securities is added in full: $250,000 + $140,000 = $390,000. $470,000 ignores the cash cap and simply adds the two balances, which is under $500,000. $250,000 treats the cash limit as the cap for the whole account. $500,000 assumes the overall limit alone governs.Securities Investor Protection Act, 15 U.S.C. 78fff-3(a)

Which of these customer losses falls within SIPC's protection?

• a.A failed member firm cannot return fully paid shares held for a customer✓
• b.A mutual fund position drops by a third during a broad market sell-off
• c.A rep's stock tip at a solvent firm falls 40% soon after the customer buys
• d.A regional bank holding a customer's savings deposit is closed by regulators

SIPC steps in when a member broker-dealer fails and customer cash or securities are missing from the firm. It does not insure against a decline in market value, and it does not compensate for poor advice from a solvent firm; that remedy is a claim through arbitration or a lawsuit. Bank deposits are covered by FDIC insurance, not SIPC.Securities Investor Protection Act of 1970, 15 U.S.C. 78aaa et seq.

A SIPC member firm is placed in liquidation. Which of the following assets in a customer's account falls outside SIPC protection?

• a.A Treasury note purchased through the member and held there
• b.Shares of a money market mutual fund held in the account
• c.A listed corporate bond that the member holds in street name
• d.A commodity futures contract carried in the account✓

Under the Securities Investor Protection Act the term 'security' excludes commodity or futures contracts, so those positions are not protected even at a SIPC member. Money market fund shares, Treasury securities and corporate bonds are all securities that SIPC protects, up to the limits, when they are missing from a failed member.Securities Investor Protection Act, 15 U.S.C. 78lll (definition of 'security')

SIPC membership is required of broker-dealers registered under Section 15(b) of the Exchange Act, with limited exclusions. Which firm is excluded?

• a.A firm that executes orders solely for institutional accounts and nobody else
• b.A firm whose entire business is distributing registered open-end fund shares✓
• c.A firm that introduces retail accounts and clears them through another firm
• d.A firm whose only retail business is taking orders in listed options

The statute excludes broker-dealers whose business consists exclusively of distributing registered open-end fund or unit investment trust shares, selling variable annuities, the business of insurance, or rendering investment advisory services. An introducing firm, an institutional-only firm and an options-only firm are ordinary registered broker-dealers outside those categories, so they must belong to SIPC.Securities Investor Protection Act, 15 U.S.C. 78ccc(a)(2)(A)

A client asks whether SIPC works like FDIC insurance backed by a government agency. Which statement about SIPC is accurate?

• a.A self-regulatory organization that examines member firms and imposes fines
• b.A private insurer that sells coverage to broker-dealers for annual premiums
• c.A bureau within the SEC that pays customer claims from appropriated federal funds
• d.A nonprofit corporation the statute says is not a U.S. government agency✓

SIPC is a congressionally created nonprofit membership corporation whose members are most registered broker-dealers; the Act states it is not an agency or establishment of the United States government. It is not part of the SEC, it does not examine or discipline firms as FINRA does, and it is not a commercial insurer selling policies.Securities Investor Protection Act, 15 U.S.C. 78ccc(a)(1)(A)

A retail customer files a claim with FINRA Dispute Resolution against a member firm and its rep over a disputed trade. Her account agreement contains no arbitration clause. Must the firm and the rep arbitrate?

• a.Only the firm must arbitrate, since the rep is not a member of FINRA itself
• b.No, because arbitration needs a submission agreement signed after the dispute arises
• c.No, because the Customer Code applies only under a written pre-dispute agreement
• d.Yes, because the customer's request makes arbitration required for the dispute✓

Rule 12200 requires a member or associated person to arbitrate a customer dispute connected with its business when arbitration is required by a written agreement or requested by the customer. A signed submission agreement is the route for elective arbitration under Rule 12201 and is not needed here. The rule covers associated persons as well as members, and a written agreement is only one of two triggers.FINRA Rule 12200

A customer bought a limited-partnership interest from a rep on April 3, 2018, and did not learn it was misrepresented until 2023. On October 15, 2024 she files a statement of claim with FINRA arbitration. What is the likely result?

• a.It is eligible because the six years run from her discovery of the problem in 2023
• b.It is eligible because FINRA defers to the state's statute of limitations here
• c.It is ineligible, and dismissal ends the claim in every forum, court included
• d.The panel may dismiss it as ineligible, though she may still sue in court✓

Rule 12206 makes a claim ineligible once six years have passed from the occurrence or event giving rise to it, here the April 2018 sale, with no discovery rule. Dismissal under the rule does not prevent the customer from pursuing the claim in court, where the applicable statute of limitations governs. The rule does not defer to state limitations periods for eligibility.FINRA Rule 12206(a)

A FINRA Hearing Panel bars a registered representative, and he wants to challenge the decision. What is the correct order of review?

• a.The Board of Governors, then the SEC, then a federal court of appeals
• b.The SEC first, then a federal district court, with no appeal inside FINRA
• c.National Adjudicatory Council, then the SEC, then a federal court of appeals✓
• d.National Adjudicatory Council, then a federal court of appeals, bypassing the SEC

A hearing decision is appealed within FINRA to the National Adjudicatory Council. A NAC decision can then be reviewed by the SEC under Exchange Act Section 19(d), and an SEC order is reviewable in a federal court of appeals. The SEC does not hear the case first, the Board is not the first appellate step, and a court of appeals reviews the SEC's order rather than FINRA's directly.FINRA Rules 9311 and 9370; Securities Exchange Act of 1934 Section 19(d)

Customers sue a brokerage firm and its president under the Exchange Act for a branch manager's Rule 10b-5 violation. The president controlled the manager. Under Section 20(a), he avoids joint and several liability only by showing that he:

• a.received no personal compensation from the branch's transactions
• b.did not know of the facts and could not have known with reasonable care
• c.acted in good faith and did not directly or indirectly induce the violation✓
• d.had assigned branch supervision in writing to a designated principal

Section 20(a) makes a person who controls a violator jointly and severally liable unless the controller acted in good faith and did not directly or indirectly induce the act. The 'did not know and could not have known' test is the Uniform Securities Act standard, not the federal one. Delegating supervision on paper and lack of personal profit are not statutory defenses under Section 20(a).Securities Exchange Act of 1934 Section 20(a), 15 U.S.C. 78t(a)

Investors sue a broker-dealer for damages under Section 10(b) and Rule 10b-5, alleging that it carelessly failed to check a false statement in a sales brochure. To win, they generally must show that the firm acted with:

• a.negligence, because broker-dealers owe customers a duty of care
• b.a material misstatement alone, as under Section 11 registration liability
• c.a prior SEC enforcement finding that the same statement was false
• d.scienter, meaning intent to deceive, manipulate or defraud investors✓

The Supreme Court held in Hochfelder that a private damages action under Section 10(b) and Rule 10b-5 requires scienter; negligence is not sufficient. A material misstatement without a culpable state of mind is the Section 11 style of liability, which does not apply to Rule 10b-5. A private plaintiff does not need a prior SEC action.Securities Exchange Act of 1934 Section 10(b) and Rule 10b-5; Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)

A buyer purchased stock on June 8, 2019, from a broker-dealer that made a fraudulent misstatement in the sale. She discovered the fraud on January 15, 2022. Under the federal limitations period for private securities-fraud claims, what is the last day to sue?

• a.January 15, 2027
• b.June 8, 2021
• c.January 15, 2024✓
• d.June 8, 2024

A private action for securities fraud must be brought by the earlier of two years after discovery of the facts or five years after the violation. Two years after discovery is January 15, 2024; five years after the sale is June 8, 2024; the earlier date controls. June 8, 2021 measures two years from the sale and January 15, 2027 measures five years from discovery, which swaps the anchors of the two periods.28 U.S.C. 1658(b)

The securities Administrator of State F asks the State G Administrator to issue a subpoena to a witness in State G for an investigation of conduct in State F. Under Section 407(e), when may the State G Administrator do so?

• a.If the activities alleged would be a violation of State G's Act had they occurred in State G✓
• b.Only if the witness has already been charged with a crime in State F or is a resident of State F, in which case the subpoena may issue
• c.Only if both states' Acts have identical registration requirements for the person involved, which the Administrator must first certify
• d.Never, because subpoenas may be used only for violations within the state issuing them, and not for any outside conduct

Section 407(e) lets the Administrator issue and enforce subpoenas in the state at the request of the securities administrator of another state if the activities alleged to be a violation would be a violation of the Act had they occurred in the state. Criminal charges or identical statutes are not required.Uniform Securities Act (1956, as amended by NASAA) §407(e)

Under the Uniform Securities Act, which description of the term 'state' is correct?

• a.Only the fifty states of the Union, which are the jurisdictions that have adopted a securities act of their own
• b.Any state, territory or possession of the United States, the District of Columbia and Puerto Rico✓
• c.The fifty states and the District of Columbia, but not territories, possessions or Puerto Rico under any rule
• d.The fifty states and any foreign country that has adopted a securities act similar to the Uniform Act

The Act defines state broadly to include any state, any territory or possession of the United States, the District of Columbia and Puerto Rico. The definition does not extend to foreign countries, and it does not stop at the fifty states.Uniform Securities Act (1956, as amended by NASAA) Sec. 401(n)