Series 66

By Investopedia AAA

Remedies and Administrative Procedures - Other Penalties and Liabilities: Investment Advice and Rescission

Investment Advice
Any investment advice in violation of the USA is also liable for civil penalties, as long as the advice was dispensed for a fee.

Those subject to fraudulent investment advice can sue for:

+ Cost of the advice
+ Loss resulting from the advice
+ Attorney fees (reasonable), and other costs
+ Interest____________________ _
- Money (dividend or interest) received
= Damages


Exam Tips and Tricks
In this case, remember the acronym CLAIM. If investment advice was in violation of the USA and was dispensed for a fee, an investor can CLAIM damages.


Statute of Limitations
Once a person discovers a violation of the USA, he or she has two years to sue, or three years from the date of the initial transaction.

Rescission
If an agent/person discovers a violation of the USA, a letter of rescission - containing an offer to buy back the security in question - may be tendered. Of course, the letter of rescission must also take into consideration (and make an offer for) any interest potentially gained or lost. In short, the formulas given for civil losses apply equally for a letter of rescission - with the exception that the party issuing the letter of rescission is generally trying to avoid legal fees. Furthermore, it is important to note that once a rescission offer is tendered, the buyer of the securities must respond within 30 days, or he or she gives up all rights to take legal action at a later date.

Example
Billy, an agent of Bad Boy Brokers, Inc, discovers that he has violated the USA by misquoting dividend information which led to the purchase of a security by a customer. Though Billy's firm has had a few run-ins with the Administrator in the past, he's trying to reestablish the firm's reputation as a reliable business. He realizes that his client invested $1,000, expecting a 10% dividend. Billy immediately writes a letter of rescission, offering to repurchase the securities. In the time it takes for Billy to send the letter and for his client to agree to sell the securities (three days), the stock appreciates $5. Billy's client sells the securities to Billy for a $5 profit (assuming, hypothetically, that no commissions are paid). What is the total amount Billy owes his client?

Answer
First, Billy owes his client $995, as the client already received $5 in capital appreciation.

Second, Billy rescinded the offer in three days, but had guaranteed 10%, which would equate to $3.65 a day. So, Billy also owes his client $10.95 in interest. Billy's total tally is $995 + $10.95, working out to $1,005.95 (assuming the client already received an additional $5).
Other Penalties and Liabilities: Criminal

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