the Blue Sky Laws
Yes, there are
50 other securities regulators other than the SEC
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. These state
rules are known as "Blue Sky Laws".
The origin of the term is a bit unclear, but the first use of the term
that we are aware of is in an opinion of Justice McKenna of the United
States Supreme Court, in 1917. Justice McKenna wrote the Court's opinion
in Hall vs. Geiger-Jones Co., 242 U.S. 539 (1917), which was three cases,
all dealing with the constitutionality of state securities regulations.
Justice McKenna wrote
The name that is given to the law indicates the evil at which it is
aimed, that is, to use the language of a cited case, "speculative schemes
which have no more basis than so many feet of 'blue sky'"; or, as stated
by counsel in another case, "to stop the sale of stock in fly-by-night
concerns, visionary oil wells, distant gold mines and other like fraudulent
exploitations." Even if the descriptions be regarded as rhetorical,
the existence of evil is indicated, and a belief of its detriment; and
we shall not pause to do more than state that the prevention of deception
is within the competency of government and that the appreciation of
the consequences of it is not open for our review.
Unfortunately, Justice McKenna never gave a reference to
the "cited case" that he referred to, and the Hall cases have
become known as The Blue Sky Cases, and Justice McKenna as the author
of the phrase.
While these laws vary from state to state, the laws require registration
of securities offerings, and registration of brokers and brokerage firms.
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.
While anti-fraud regulations are most commonly enforced by the SEC and
the various SROs, the states also have the power and authority to bring
actions against securities violators pursuant to state law. Each state
has its own securities act, known colloquially as the "blue sky law",
which regulates both the offer and sale of securities as well as the registration
and reporting requirements for broker-dealers and individual stock brokers
doing business (both directly and indirectly) in the state, as well as
investment advisers seeking to offer their investment advisory services
in the state.
Recently, federal legislation was enacted which limited the ability of
the states to review, limit or otherwise restrict the sale of most securities.
The legislation was designed to eliminate the duplicitative nature of
the federal and state securities laws. Today, in most instances, the states
authority to review registration of securities offerings that are offered
on a national basis have been severely restricted. However, there are
notice and filing requirements in each state, which must still be complied
with. Additionally, the legislation did not affect the ability of the
state regulators to conduct investigations and to bring fraud actions.opyright
2001 Mark J. Astarita. firstname.lastname@example.org
Registration of Securities Transactions
It is important to keep in mind that before a security is sold in a
state, there must be a registration in place to cover the transaction,
and, the brokerage firm, and the stock broker, must each be registered
in the state, or otherwise exempt from the registration requirements.
With few exceptions, every offer or sale of a security must, before
it is offered or sold in a state, be registered or exempt from registration
under the securities, or blue sky laws, of the state(s) in which the security
is offered and sold. Similarly, every brokerage firm, every issuer selling
its own securities and an individual broker or issuer representative (i.e.,
finder) engaged in selling securities in a state, must also be registered
in the state, or otherwise exempt from such registration requirements.
Most states securities laws are modeled after the Uniform Securities Act
of 1956 ("USA"). To date, approximately 40 states use the USA as the basis
for their state blue sky laws.
However, although most blue sky laws are modeled after the USA, blue
sky statutes vary widely and there is very little uniformity among state
securities laws. Therefore, it is vital that each state's statutes and
regulations be reviewed before embarking upon any securities sales activities
in a state to determine what is permitted, or not permitted, in a particular
state. To make matters more complicated, while some states may have identical
statutory language or regulations covering particular activities or conduct,
their interpretation may differ dramatically from state to state. However,
state Securities Commission staff are 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 for which exemptions are available.
The best advice, then, is before offering any security for sale in any
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
to be made in the particular state.
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 amended Section 18 of the Securities Act of 1933, as amended (the
"Act"), thereby creating 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.
Covered securities include: securities listed (or approved for listing)
on the NYSE, AMEX and the Nasdaq/National Market, and securities of the
same issuer which are equal in rank or senior to such listed securities;
mutual fund shares; securities sold to certain qualified purchasers (as
yet not defined by the SEC); certain securities exempt under Section 3(a)
of the Act (including government or municipal securities, bank securities
and commercial paper); and securities exempt from registration under the
Act if sold in transactions complying with Rule 506 of Regulation D under
the Act. Although NSMIA preempts state securities registration requirements,
NSMIA preserves the right of the states to investigate and prosecute fraud.
As a result of NSMIA, states may no longer require the registration of
covered securities; however, states may, as permitted under NSMIA, require
filings and the payment of fees for offers and sales in their state of
covered securities other than those which are listed (or approved for
listing) on the designated exchanges or securities senior to such securities
(i.e.; preferred shares or debt securities of an issuer with common stock
listed on the designated exchanges). Additionally, since NSMIA only preempts
state securities registration requirements, broker-dealer and agent/salesperson
registration requirements (applicable to individuals engaged in the offer
and sale of covered securities) must still be examined to determine whether
action is required to be taken in connection with a particular offering
or transaction. 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
In the area of Broker-Dealer and Agent (stock broker) registration,
the Blue Sky laws are equally convoluted, with each state having different
requirements. Fortunately, many states have abandoned use of their own
particular forms and submissions, and permit the registration filings
for broker-dealers and agents to be made through the National Association
of Securities Dealer's Central Registory Depository system (CRD), and
utilize the examinations conducted by the NASD for testing purposes.
However, even here, and despite the advent of the CRD (and now, Web
CRD), many states insist on following their own particular regulatory
procedures for registering both broker-dealer firms and their registered
both broker-dealer firms and their registered employees have their own
policies. For example, initial broker-dealer registrations may not be
made through CRD in such states as California, Hawaii, Michigan, (others)
certain states require certified or audited financials, which are not
required by the NASD. Nearly every state requires a stock broker to take
and pass the NASD Series 63 exam, except Colorado, Florida, Louisiana,
Maryland, Ohio and Vermont. Copyright 2001 Mark
J. Astarita. email@example.com
The myraid of state regulations continues to plague the securities industry,
causing untold delays and inadvertant 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
In an effort to reduce those delays, the TAT system was introduced in
1984, which permits a broker to transfer his registration to another firm,
assuming he does not have any disciplinary record without any delays,
and gives the broker 21 days to complete the registration process for
each particular state. However, even today, over 10 years later, only
20 states permit brokers to TAT their registration to a new firm, and
to be immediately registered without the delays attendant in physically
transfering the registration in every state.
As can be seen from even this brief overview, the State Blue Sky laws
are a complicated web of regulations, from 50 different jurisdictions.
Add to that mix a complex series of SEC rules and regulations, and regulations
from the NASD and the various securities exchanges, and one can well imagine
why the securities industry is indeed the most highly regulated industry
in the country.
Later revisions to this document will examine the effect these regulations
have on the industry.