1.2 State Regulation
Federal regulation doesn't tell the whole story. Every state has its own securities laws — and understanding this dual regulatory system is crucial for the SIE exam.
Blue Sky Laws: The Basics
Blue Sky Laws are state-level securities regulations designed to protect investors from fraud. The colorful name comes from early 20th-century concerns about promoters selling investments with "no more basis than so many feet of blue sky."
Historical Context
State securities regulation actually predates federal regulation:
1911 — Kansas becomes the first state to pass a securities law
1933 — Congress passes the first federal securities law (Securities Act of 1933)
Today — All 50 states, D.C., Puerto Rico, and U.S. territories have their own securities laws
This means securities professionals must comply with both federal and state regulations.
State Securities Administrators
Each state has a securities administrator (sometimes called a securities commissioner) who enforces that state's blue sky laws. These officials have significant authority within their jurisdictions.
Key Responsibilities
Registration — Review and approve securities offerings in the state
Licensing — Register broker-dealers, agents, investment advisers, and their representatives
Enforcement — Investigate fraud and take action against violators
Investor Education — Provide resources to help residents make informed investment decisions
Enforcement Powers
State administrators can:
Deny, suspend, or revoke registrations and licenses
Issue cease and desist orders to stop illegal activity
Impose fines and other penalties
Refer cases to state attorneys general for criminal prosecution
NASAA: Coordinating State Regulation
The North American Securities Administrators Association (NASAA) coordinates state securities regulation across jurisdictions. Founded in 1919, NASAA's members include securities administrators from all 50 states, D.C., Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.
NASAA's Role
Develops model rules that states can adopt for consistency
Creates uniform exams like the Series 63, 65, and 66
Coordinates enforcement across state lines
Advocates for investor protection at the federal level
The Uniform Securities Act
To bring consistency to state regulation, NASAA developed the Uniform Securities Act. Most states base their securities laws on one of these model acts:
Uniform Securities Act of 1956 — Original model
Revised Uniform Securities Act of 1985 — Updated version
Uniform Securities Act of 2002 — Current model
While these provide a framework, each state can — and often does — modify the model to fit local needs. This is why securities laws vary from state to state.
Registration Requirements
Securities Registration
Unless an exemption applies, securities must be registered in each state where they're offered or sold. There are three methods of state registration:
Coordination — Filed simultaneously with federal registration — IPOs and public offerings
Qualification — Full state review process — Offerings not registered federally
Notice Filing — Simplified notification to the state — Federal covered securities
Person Registration
Securities professionals must also register in states where they conduct business:
Broker-dealers must register in each state where they have an office or conduct business
Agents (registered representatives) must register in states where they sell securities
Investment advisers must register with either the SEC or their home state, depending on assets under management
Investment adviser representatives typically register at the state level
Federal Preemption: Where States Can't Regulate
The National Securities Markets Improvement Act of 1996 (NSMIA) limited state authority over certain "federal covered" securities and advisers. This prevents duplicative regulation.
Federal Covered Securities
States cannot require registration for:
Securities listed on national exchanges (NYSE, NASDAQ)
Securities issued by investment companies (mutual funds)
Securities sold to qualified purchasers
Securities in certain exempt transactions
Federal Covered Advisers
Investment advisers with $100 million or more in assets under management must register with the SEC, not individual states. However, states retain:
Authority to require notice filings and fees
Anti-fraud enforcement powers
Registration authority over investment adviser representatives
State vs. Federal: A Comparison
Primary Regulator: Federal — SEC, FINRA; State — State Administrator
Geographic Scope: Federal — Nationwide; State — Within state borders
Focus: Federal — Large offerings, major markets; State — Local investor protection
Enforcement Style: Federal — Often handles major cases; State — "Cops on the beat" for local fraud
Why Both Matter
State regulators often call themselves the "cops on the beat" because they're closer to local investors and can respond quickly to grassroots fraud. Meanwhile, federal regulators handle larger, nationwide issues.
In Practice: Multi-State Compliance
Consider a broker-dealer operating in multiple states:
1. Federal Registration — Register with the SEC and become a FINRA member
2. State Registration — Register in each state where the firm operates
3. Agent Registration — Each registered representative must register in states where they solicit customers
4. Ongoing Compliance — Follow both federal rules and each state's specific requirements
This is why large firms have dedicated compliance departments — navigating 50+ sets of regulations requires expertise.
Key Takeaways
Blue Sky Laws are state-level securities regulations that predate federal laws
Each state has a securities administrator with registration, licensing, and enforcement powers
NASAA coordinates state regulation and creates uniform exams
Federal preemption limits state authority over certain securities and large advisers
Securities professionals must comply with both federal and applicable state regulations
Frequently Asked Questions
Q: What is the origin of the term "Blue Sky Laws"?
A: They referred to investments with no more substance than blue sky. Blue Sky Laws got their name from early concerns about promoters selling investments with "no more basis than so many feet of blue sky" — meaning worthless, speculative schemes. The term reflects the laws' purpose of protecting investors from fraud.
Q: Which organization coordinates securities regulation among the states and developed the Uniform Securities Act?
A: North American Securities Administrators Association (NASAA). NASAA (North American Securities Administrators Association) coordinates state securities regulation and developed the Uniform Securities Act to bring consistency across states. The SEC is a federal regulator, FINRA regulates broker-dealers, and the MSRB focuses on municipal securities.
Q: Under federal preemption rules, which of the following is a "federal covered security" that states cannot require to be registered?
A: Securities listed on the New York Stock Exchange. Securities listed on national exchanges like the NYSE or NASDAQ are "federal covered securities" under NSMIA. States cannot require registration for these securities, though they may require notice filings and retain anti-fraud authority.