NASAA Series 63Remedies and Administrative ProvisionsHard
An agent employed by a broker-dealer commits fraud while selling securities to a client. Under the civil liability provisions of the Uniform Securities Act, the broker-dealer that employed the agent:
- Amay be held jointly and severally liable unless it did not know and, in the exercise of reasonable care, could not have known of the fraudulent conduct
- Bis liable only if a firm principal personally made the fraudulent statements to the client
- Cis automatically liable for the agent's fraud regardless of any precautions the firm took
- Dcannot be held liable because civil liability attaches solely to the individual agent who committed the act
Show answer & explanationAnswer & explanation
Correct answer: A. may be held jointly and severally liable unless it did not know and, in the exercise of reasonable care, could not have known of the fraudulent conduct
Under the USA, controlling persons and employers such as broker-dealers may be held jointly and severally liable for an agent's violations unless they can establish a due-diligence defense — that they neither knew nor, with reasonable care, could have known of the misconduct.
Why the other options are wrong
- B. Incorrect; liability does not require personal participation by a principal.
- C. Incorrect; the USA provides a due-diligence defense that can relieve automatic liability.
- D. Incorrect; employers can be held liable for agents' violations under controlling-person liability provisions.
Controlling Person / Employer Liability
Broker-dealers and other controlling persons may be jointly and severally liable for violations committed by their agents unless they prove a reasonable-care due-diligence defense.
- Liability extends beyond the individual wrongdoer to supervisors/employers.
- Due-diligence defense requires proof of lack of knowledge despite reasonable supervision.
- Encourages firms to maintain robust supervisory procedures.
Memory trick: 'The firm shares the chain unless it proves it broke no link.'