Criminal and Civil Penalties
Violations of the Uniform Securities Act can result in both criminal penalties (imposed by courts) and civil liabilities (which may include administrative penalties and private lawsuits). Understanding these consequences is essential for the Series 63 exam.
Criminal vs. Civil Violations
The key distinction between criminal and civil violations is intent:
| Violation Type | Intent Required | Who Imposes Penalty |
|---|---|---|
| Criminal | Willful violation | Courts (judge/jury) |
| Civil | May be negligent or intentional | Administrator or courts |
Key Point: A willful violation occurs when the person knew what they were doing was wrong or prohibited. This mental state (called "mens rea") is required for criminal prosecution.
Criminal Penalties
The "5-5-3 Rule"
A helpful memory device for criminal penalties is the "5-5-3 Rule":
| Component | Value |
|---|---|
| Statute of limitations | 5 years |
| Maximum fine | $5,000 per violation |
| Maximum imprisonment | 3 years per violation |
Important Details
- Penalties are per violation—multiple violations result in multiple penalties
- Example: 3 violations could result in up to $15,000 in fines and 9 years in prison
- Imprisonment requires willful violation
- Only courts can impose criminal penalties—not the Administrator
Exam Alert: The Administrator cannot impose jail time. Only courts can sentence someone to prison following a criminal conviction.
Statute of Limitations
Criminal Prosecutions
| Period | Time Limit |
|---|---|
| Statute of limitations | 5 years from the violation |
No criminal prosecution can be brought more than 5 years after the violation occurred.
Civil Actions
| Trigger | Time Limit |
|---|---|
| From violation | 3 years |
| From discovery | 2 years after discovery (but no later than 3 years from violation) |
This is often expressed as: "3 years from violation, or 2 years from discovery, whichever expires first."
Civil Liabilities
Civil violations can result in:
Administrative Penalties
| Penalty | Description |
|---|---|
| Fines | Monetary penalties imposed by Administrator |
| Disgorgement | Return of ill-gotten profits |
| Restitution | Payment to harmed investors |
| Registration actions | Denial, suspension, or revocation |
Private Right of Action
Investors who are harmed have the right to sue for damages:
- Actual damages - the amount lost due to the violation
- Interest - at the legal rate from the date of transaction
- Attorney's fees - if provided by statute
- Costs - litigation expenses
Rescission Rights
Rescission is the right to undo a transaction. When a violation occurs:
Seller's Liability (Sale Violations)
If a seller violates the USA, the buyer may:
- Recover the consideration paid (purchase price)
- Plus interest at the legal rate
- Plus attorney's fees and costs
- Minus any income received from the security
Buyer's Liability (Purchase Violations)
If a buyer violates the USA (rare), the seller may:
- Recover the security
- Plus damages if the security was sold
Right of Rescission (Offer to Make Whole)
Before a lawsuit is filed, a violator may offer to rescind the transaction:
The Rescission Letter
| Element | Description |
|---|---|
| Written offer | Must be in writing |
| Content | Offer to buy back the security at original price |
| Adjustments | Plus interest, minus income received |
| Deadline | Buyer has 30 days to accept |
Effect of Rescission Offer
If the violator makes a proper rescission offer:
- And it's accepted: Transaction is undone, no further liability
- And it's rejected: Limits violator's potential liability
Exam Tip: The rescission letter allows a person who discovers they've violated the USA to proactively offer to make the investor whole, potentially avoiding litigation.
Arbitration vs. Litigation
Most brokerage agreements require disputes to be resolved through arbitration:
- Arbitration is typically faster and less expensive than litigation
- FINRA operates the largest securities arbitration forum
- Arbitration decisions are generally binding and final
- Investors signing arbitration agreements waive right to sue in court
Burden of Proof
| Proceeding Type | Standard of Proof |
|---|---|
| Criminal | Beyond a reasonable doubt |
| Civil | Preponderance of the evidence |
| Administrative | Varies; typically preponderance |
Key Takeaways
- Criminal penalties require willful violation
- The "5-5-3 Rule": 5-year statute of limitations, $5,000 max fine, 3 years max imprisonment (per violation)
- Civil statute of limitations: 3 years from violation, or 2 years from discovery
- Only courts can impose jail time—not the Administrator
- Investors have a private right of action for damages
- Rescission allows violators to offer to undo the transaction
- Rescission letters must be in writing; buyer has 30 days to accept
- Most disputes are resolved through arbitration, not litigation
A person willfully violates the Uniform Securities Act. Under the "5-5-3 Rule," what are the potential criminal penalties?
An investor discovers they were defrauded 2.5 years after the transaction occurred. Under the civil statute of limitations, how long do they have to file a lawsuit?
An agent discovers they sold an unregistered security in violation of the USA. To potentially avoid liability, the agent can:
Who has the authority to sentence a person to jail for a willful violation of the Uniform Securities Act?
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