NASAA Series 63Remedies and Administrative ProvisionsHard
An investor sues both the agent who sold her unregistered, non-exempt securities and the agent's employing broker-dealer for damages. Under the Uniform Securities Act's civil liability provisions, the broker-dealer may avoid liability as a controlling person if it can show that it:
- AReimbursed the investor in full before the lawsuit was filed
- BWas unaware the agent worked for the firm at the time of the sale
- CDid not know, and in the exercise of reasonable care could not have known, of the facts giving rise to liability
- DImmediately terminated the agent after the lawsuit was filed
Show answer & explanationAnswer & explanation
Correct answer: C. Did not know, and in the exercise of reasonable care could not have known, of the facts giving rise to liability
Controlling persons, such as employing broker-dealers, are jointly and severally liable for an agent's violations unless they can prove they did not know, and could not have known through reasonable care, of the conduct or facts giving rise to liability. This is the statutory affirmative defense available to controlling persons.
Why the other options are wrong
- A. Reimbursement may mitigate damages but is not the statutory defense to controlling person liability.
- B. Not knowing the agent works there is not the relevant standard; the standard concerns knowledge of the violative conduct.
- D. Termination after the fact does not eliminate liability for the completed violation.
Controlling Person Defense
A controlling person (e.g., employing broker-dealer) can avoid liability for an agent's violation by proving lack of knowledge and reasonable care in not knowing of the facts.
- Controlling persons are jointly and severally liable by default
- Affirmative defense requires no knowledge AND reasonable care
- Applies to employers, officers, and other controlling entities
Memory trick: No knowledge, no fault, reasonable care is the vault.