While the SEC directly, and through its oversight of the NASD and the various Exchanges, is the main enforcer of the nation`s securities laws, each individual state has its own securities laws and rules known as “Blue Sky Laws.” These regulate the offer and sale of securities and the registration and reporting requirements for broker-dealers, individual stockbrokers, and investment advisers doing business or offering services in the state. Blue Sky Laws are designed to stop fraudulent exploitations. Each state has a regulatory agency, which administers the law, typically known as the state Securities Commissioner. A list of state securities commissioners, and their addresses, is available in our Guide to State Securities Regulators.
Recently, federal legislation, designed to eliminate the duplicative nature of the federal and state securities laws, was enacted. This has limited the ability of the states to review, limit, or otherwise restrict the sale of most securities, particularly offerings that are offered on a national basis. There are notices and filing requirements in each state, however, which must be complied with and the legislation did not affect the ability of the state regulators to conduct investigations and respond to fraudulent actions.
Registration of Securities Transactions
With few exceptions, before a security is offered or sold in a state, there must be (unless exempt) a registration covering:
• the transaction
• the brokerage firm
• the stock broker
• issuers selling their own securities
Though most states securities laws are modeled after the Uniform Securities Act of 1956 (“USA”), Blue Sky statutes vary widely and there is very little uniformity among state securities laws. Even when using identical statutory language or regulations covering particular activities or conduct, interpretation may differ dramatically from state to state. However, state Securities Commission staff is available to assist in answering questions regarding particular statutory provisions or regulations.
Fortunately, many types of securities, and many transactions in securities, are exempt from state securities registration requirements. For example, many states provide for transactional exemptions for Regulation D private offerings, provided there is full compliance with SEC Rules 501-503. However, through certain types of offerings or transactions may not require registration, many states require filings or place additional conditions on exemptions available for many different offerings.
To complicate matters further, The National Securities Markets Improvement Act of 1996 (“NSMIA”) was enacted in October 1996 in response to the states’ failure to uniformly regulate certain types of national securities offerings. Among other changes, NSMIA created a class of securities – referred to as “covered securities” – the offer and sale of which (through licensed broker-dealers) are no longer subject to state securities law registration requirements. NSMIA only preempts state securities registration requirements, however, and preserves the right of the states to investigate and prosecute fraud. Therefore, although covered securities are no longer subject to substantive state review, blue-sky action with respect to offerings of covered securities is still necessary.
Brokers, Dealers and Agents
Blue Sky laws regarding broker-dealer and agent (stockbroker) registration are equally convoluted, with each state having different requirements. Though many states have permit the registration filings for broker-dealers and agents to be made through the National Association of Securities Dealer’s Central Registry Depository system (CRD), and utilize the examinations conducted by the NASD for testing purposes, they follow their own particular regulatory procedures for registering broker-dealer firms. Some states require certified or audited financials, (which are not required by the NASD) and nearly every state requires a stockbroker to take and pass the NASD Series 63 exam. In addition, some states have failed to comply fully with federal rulings. For example, NY has used The Martin Act to wage its war against Wall Street, refusing to regulate private offerings.
The myriad of state regulations continues to plague the securities industry, causing untold delays and inadvertent violations by even the most careful brokerage firm. For registered representatives, even a simple matter like changing brokerage firms can result in a loss of business, for the transfer of the registration from one broker-dealer to the next can take days or weeks.
Blue Sky laws are a complicated web of regulations, from 50 different jurisdictions. (in addition to the complex series of SEC rules and regulations, and regulations from the NASD and the various securities exchanges.) It is crucial then, to obtain legal review of a state’s statutes and regulations be reviewed before embarking upon any securities sales activities to determine what is permitted, or not permitted, in that particular state. Experienced Blue Sky counsel should be retained to review the applicable state blue-sky laws and take any action necessary to permit the offering.
Contact Virtual Paralegal Services for help navigating through the various rules and regulations.