Notice And Hearing

Concerned about abusive sales practices, the Administrator of State Y wants to act against two products: (1) securities of a small in-state nonprofit issuer that are exempt under the Act, and (2) shares of an open-end investment company registered under the Investment Company Act of 1940, which are federal covered securities. The Administrator's authority is:

1. A.The Administrator may by order revoke the nonprofit issuer's exemption, but may not disturb the status of the federal covered investment company sharesCorrect. Revoking a state exemption is within the Administrator's power; federal covered status is not.
2. B.The Administrator may act against the investment company shares only, because a nonprofit issuer's exemption is unconditionalThis inverts both halves of the rule; the nonprofit exemption is revocable and federal covered status is not.
3. C.The Administrator may revoke the exempt status of both, because state authority over securities sold to state residents is plenaryFederal law removed federal covered securities from state registration and exemption authority.
4. D.The Administrator may act against neither, because an exemption granted by statute may be withdrawn only by legislative amendmentThe Act expressly authorizes the Administrator to deny or revoke exemptions by order.

Why: The Administrator may by order deny or revoke a state-law exemption such as the nonprofit issuer exemption, subject to notice and hearing rights. Federal covered securities are outside the state's registration and exemption framework entirely, leaving the Administrator with notice filings, fees, and antifraud enforcement.

On Monday, April 6, 2026 the State N Administrator enters an order, after notice and hearing, revoking a transaction exemption with respect to sales of Nethercote Granite stock. Broker-dealer Salterby Cross sold the stock in reliance on that exemption on March 30 and again on April 9. Salterby Cross proves it neither knew of the order on April 9 nor could have known of it in the exercise of reasonable care. Under the Uniform Securities Act:

1. A.Neither sale violates the registration provisions, because the order is not retroactive and the firm proved it could not have known of the orderCorrect. Non-retroactivity protects the March 30 sale and the reasonable care defence protects the April 9 sale.
2. B.Both sales violate the registration provisions, because revocation of an exemption reaches every sale of that securityThe Act states expressly that such an order may not operate retroactively.
3. C.Only the April 9 sale violates the provisions, because no defence is available once an order has been enteredThe Act supplies a lack of knowledge defence for post-order sales, and the firm met its burden of proof.
4. D.Only the March 30 sale violates the provisions, because the order revoked the exemption the firm had been relying on all alongThis inverts non-retroactivity. A sale made before the order stands.

Why: An order denying or revoking an exemption operates prospectively only, so the March 30 sale made before the order is unaffected. For a sale made after entry of the order, the Act provides a defence: a person is not considered to have violated the registration provisions if he sustains the burden of proving that he did not know, and in the exercise of reasonable care could not have known, of the order. Salterby Cross carried that burden, so the April 9 sale is protected as well.