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Second, Billy rescinded the offer in three days, but had guaranteed 10%, which would equate to $3.65 a day.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
Related Articles
  1. Investing Basics

    Brokers and RIAs: One and the Same?

    Brokers and registered investment advisors have some key differences. Here's what you need to know.
  2. Professionals

    Understanding Series 6

    Upon successful completion of the Series 6, an individual will have the qualifications needed to sell open end mutual funds and variable annuities
  3. Professionals

    Top Strategies on How to Become a Stock Broker

    Gunning to be a stock broker and want an edge? Here's some veteran advice.
  4. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  5. Professionals

    Understanding Series 63

    Series 63 is a securities license that entitles the holder to sell securities in a particular state.
  6. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  7. Insurance

    Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace this test.
  8. Retirement

    6 Proven Tips For Series 6 Success

    These techniques can help you pass this test without the added stress.
  9. Insurance

    Tips For Passing The Series 6 Exam

    Find out what you can do during the test to make sure you get a passing score.
  10. Professionals

    Banker Or Broker: Which Career Is Right For You?

    Bankers and stock brokers may share similar traits, but there are many differences between the two professions.
RELATED TERMS
  1. Series 6

    A securities license entitling the holder to register as a limited ...
  2. Series 79

    A examination to ensure a candidate is qualified to become a ...
  3. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  4. Series 34

    An exam required for individuals seeking to engage in off-exchange ...
  5. Financial Advisor

    One who provides financial advice or guidance to customers for ...
  6. Series 23

    An exam offered by the Financial Industry Regulatory Authority ...
RELATED FAQS
  1. If I have only a limited amount of time to study for the Series 6, what should I ...

    The Series 6 Investment Company and Variable Contracts Products Representative Qualification Examination is administered ... Read Full Answer >>
  2. What role does the 'chip cycle' play in the electronics sector?

    There are several highly acclaimed private Series 6 Exam courses in the United States. Many can be completed online. Popular ... Read Full Answer >>
  3. What does passing the Series 6 enable me to do?

    The Series 6, or the Investment Company Products/Variable Contracts Limited Representative, exam is administered by the Financial ... Read Full Answer >>
  4. What are the differences between the Series 6 exam and the Series 7 exam?

    The Financial Industry Regulatory Authority (FINRA) offers a variety of licenses that must be obtained before conducting ... Read Full Answer >>
  5. Do I have to successfully complete the Series 7 exam before I can register for the ...

    There are no prerequisites to register for the Series 63 exam. However, once you have registered for the exam, you must schedule ... Read Full Answer >>
  6. I completed the Series 6, do I have to complete the entire Series 7?

    After having written the Series 6 examination, there would be significant overlap with the Series 7 in areas such as mutual ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!