Anti-Fraud Provisions

The anti-fraud provisions of the Uniform Securities Act (USA) represent the most important consumer protection rules in state securities law. These provisions apply broadly to all securities transactions, regardless of whether the securities or transactions are exempt from registration. Understanding anti-fraud rules is critical for the Series 63 exam, as they account for a significant portion of test questions.

Universal Application of Anti-Fraud Rules

One of the most important concepts to understand is that anti-fraud provisions apply to ALL securities transactions—even when the securities themselves are exempt from registration or the transaction qualifies for an exemption.

Exam Tip: A common exam question involves an agent selling government bonds (exempt securities) but making false statements. The correct answer is always that anti-fraud provisions still apply—no exemption protects against fraud.

Section 101: General Anti-Fraud Provisions

Section 101 of the USA prohibits any person from engaging in fraud in connection with the offer, sale, or purchase of any security. The anti-fraud provisions make it unlawful to:

Prohibited Activities

1. Employ any device, scheme, or artifice to defraud - Using any method or plan designed to deceive or cheat investors

2. Make untrue statements of material fact - Stating something false that a reasonable investor would consider important in making an investment decision

3. Omit material facts - Failing to disclose information that would be necessary to make other statements not misleading

4. Engage in acts, practices, or courses of business that operate as fraud or deceit - Any conduct that has the effect of defrauding investors, even if not intentional

Materiality Standard

A material fact is information that a reasonable investor would consider important in making an investment decision. The test is whether there is a substantial likelihood that a reasonable investor would consider it important.

Examples of Material Facts

Material vs. Immaterial Information

• Material: "The company is under SEC investigation for accounting fraud"
• Immaterial: "The CEO's favorite color is blue"

Key Point: Immaterial facts need not be disclosed. Only material facts must be shared with investors.

Scienter and Intent

Scienter refers to the intent to deceive, manipulate, or defraud. Under the USA anti-fraud provisions:

• Intentional fraud clearly violates anti-fraud provisions
• Reckless disregard for the truth may also constitute fraud
• Negligent conduct (unintentional) may still result in civil liability depending on the specific provision

Who Is Subject to Anti-Fraud Provisions?

Anti-fraud provisions apply to any person involved in securities transactions:

• Broker-dealers and agents
• Investment advisers and investment adviser representatives
• Issuers and their officers/directors
• Any person making offers or sales
• Canadian broker-dealers (even if exempt from registration)

Exam Alert: Even persons who are exempt from registration requirements are still subject to anti-fraud provisions. A Canadian broker-dealer doing business with existing retail customers temporarily in the U.S. is exempt from registration but fully subject to anti-fraud rules.

Key Takeaways

• Anti-fraud provisions apply to ALL securities transactions, including exempt securities and exempt transactions
• Material facts must always be disclosed; immaterial facts need not be disclosed
• Making untrue statements or omitting material facts constitutes fraud
• Anti-fraud provisions apply to any person, including those exempt from registration
• Exempt securities (like government bonds) are NOT exempt from anti-fraud provisions