DAR File No. 39300

Commerce, Securities

Rule R164-32

Codification of Precedent

Notice of Proposed Rule

(New Rule)

DAR File No.: 39300
Filed: 04/27/2015 08:55:14 AM

RULE ANALYSIS

Purpose of the rule or reason for the change:

The purpose of this rule is to incorporate principles and interpretations of law that are articulated in final agency orders.

Summary of the rule or change:

Holdings set forth in final orders issued in formal administrative proceedings are codified. The principles of law addressed include the limited liability company exemption set forth in Subsection 61-1-13(1)(ee)(ii)(B); the common enterprise language of Subsection 61-1-13(1)(s)(i); the false statement/material omission language of Subsection 61-1-1(2); and statutes of limitation, including that set forth in Section 61-1-21.1.

State statutory or constitutional authorization for this rule:

• Subsection 63G-3-201(3)
• Section 61-1-24
• Subsection 63G-3-201(2)
• Subsection 61-1-13(1)(ee)(ii)(B)
• Subsection 63G-3-201(6)
• Subsection 61-1-1(2)
• Subsection 61-1-13(1)(s)(i)
• Section 61-1-21.1

Anticipated cost or savings to:

the state budget:

Promulgating this rule will not create any direct costs for the Division. It is anticipated that the rule will assist respondents in understanding Division precedent. As a result, it will likely encourage settlement and allow the Division to avoid the costs of litigation. The amount of potential savings cannot be quantified or estimated.

local governments:

Local governments are not required to comply with or enforce the rules that regulate the securities industry. No fiscal impact to local government is anticipated.

small businesses:

Small businesses that are party to a Division administrative action may use the rule to identify controlling precedent quickly and efficiently. It is anticipated that making this information readily available will result in meaningful savings to small businesses that must prepare a case for hearing. The amount of potential savings cannot be quantified or estimated.

persons other than small businesses, businesses, or local governmental entities:

Persons who are party to a Division administrative action may use the rule to identify controlling precedent quickly and efficiently. It is anticipated that making this information readily available will result in meaningful savings to persons who must prepare a case for hearing. The amount of potential savings cannot be quantified or estimated.

Compliance costs for affected persons:

The rule articulates principles of law. It does not require compliance. No compliance costs are anticipated.

Comments by the department head on the fiscal impact the rule may have on businesses:

As stated in the rule analysis, this filing codifies principles and interpretations of law that are articulated in final agency orders. A business that is involved in an administrative proceeding before the Securities Commission may use the rule to research established precedent in an efficient manner and, therefore, avoid costs that otherwise might be necessary in order to prepare a case for hearing. Otherwise, no fiscal impact to businesses is anticipated.

Francine A. Giani, Executive Director

The full text of this rule may be inspected, during regular business hours, at the Division of Administrative Rules, or at:

Commerce
Securities
HEBER M WELLS BLDG
160 E 300 S
SALT LAKE CITY, UT 84111-2316

Direct questions regarding this rule to:

• Jennie Jonsson at the above address, by phone at 801-530-6706, by FAX at 801-526-4387, or by Internet E-mail at [email protected]

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

06/15/2015

This rule may become effective on:

06/22/2015

Authorized by:

Keith Woodwell, Director

R164. Commerce, Securities.

R164-32. Codification of Precedent.

R164-32-1. Codification of Precedent.

(1) Authority and purpose.

(a) The Division enacts this rule pursuant to Utah Code Subsections 63G-3-201(2), (3), (6) and Section 61-1-24.

(b) This rule incorporates the principles of law:

(i) that are established by final adjudicative decisions by the Utah Securities Commission, the Division Director, or an Administrative Law Judge; and

(ii) where:

(A) agency action meets criteria requiring rulemaking as set forth in the Utah Administrative Rulemaking Act; or

(B) the Division issues a written interpretation of a state or federal legal mandate.

(2) Limited liability company exemption, Section 61-1-13(1)(ee)(ii)(B). Pursuant to SD-12-0076 (Aug. 8, 2013), a material issue of fact as to whether a respondent may claim the limited liability company exemption is created by a single investor's sworn statement that the investor:

(a) purchased shares in an LLC solely for investment purposes;

(b) took no part in the management of the LLC; or

(c) was geographically distant from the activities through which the LLC was managed.

(3) Common enterprise, Section 61-1-13(1)(s)(i). Pursuant to SD-13-0018, 0019, 0020 (Nov. 8, 2013), a common enterprise includes a circumstance in which value tendered by an offeree is:

(a) deposited into the offerer's personal or business financial account(s); and

(b) subjected to the offerer's personal control and oversight.

(4) False statement or material omission, Section 61-1-1(2).

(a) Pursuant to SD-13-0018, 0019, 0020 (Nov. 8, 2013), a rebuttable presumption of material omission is created by an investor's sworn statement that, had a certain piece of information been provided, it would have caused the investor to:

(i) question or disbelieve representations made by the offerer in connection with the transaction; or

(ii) decline to purchase the offered security.

(b) Pursuant to SD-11-0041, 0042 (April 7, 2014), an offerer makes a material omission by failing to disclose:

(i) specific information about the investment itself, including:

(A) the identity of the person to whom funds will be entrusted;

(B) the track record of the investment; or

(C) risk factors; or

(ii) the offerer's:

(A) criminal history;

(B) regulatory history; or

(C) financial history, including:

(I) bankruptcies; or

(II) civil judgments.

(c) Pursuant to SD-13-0030 (Oct. 14, 2014), an offerer makes a material omission by failing to disclose:

(i) specific information about the investment itself, including:

(A) financial statements of the common enterprise;

(B) history of late or missed payments to investors;

(C) methodology for valuing shares or similar investment units;

(D) basis for any unit value that is represented or anticipated as deriving from:

(I) future sale of the units;

(II) future sale or acquisition of the common enterprise; or

(II) any similar future event; or

(E) registration status of the security being offered; or

(ii) the offerer's:

(A) tax liens; or

(B) licensure or lack thereof.

(d) Pursuant to SD-11-0041, 0042 (April 7, 2014), it is not necessary that money change hands or that an investor suffer a financial loss before an administrative action may be taken against an offerer for false statement or material omission.

(e) Pursuant to SD-11-0041, 0042 (April 7, 2014), liability for a false statement or material omission is not limited to the person who creates or first promotes an investment.

(5) Statutes of limitation, including Section 61-1-21.1.

(a) Pursuant to SD-12-0001 (March 27, 2014), the statute of limitation specified in Section 61-1-21.1 is inapplicable to an administrative disciplinary hearing.

(b) Pursuant to SD-14-0039, 0040 (Jan. 6, 2015), there is no statute of limitation applicable to administrative actions filed by the Division under the Uniform Securities Act where no civil complaint is filed.

 

KEY: securities regulation, precedent, statutory interpretation

Date of Enactment or Last Substantive Amendment: 2015

Authorizing, and Implemented or Interpreted Law: 61-1-24; 63G-3-201(2); 63G-3-201(3); 63G-3-201(6); 61-1-13(1)(ee)(ii)(B); 61-1-13(1)(s)(i); 61-1-1(2); 61-1-21.1