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.

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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

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

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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:

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.

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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:

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

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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

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State vs. Federal: A Comparison

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.

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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.

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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