Series 66 Blue Sky Laws: State Securities Regulation and Federal Preemption

Blue sky laws are the foundational framework behind everything the Series 66 tests. Understanding their history, their current scope, and — critically — where federal law has preempted them is the intellectual foundation you need to answer registration, exemption, and enforcement questions correctly. The interplay between state and federal securities regulation is not just background knowledge; it is examined directly.

Origins of Blue Sky Laws

The term "blue sky laws" originated in a 1917 U.S. Supreme Court case (Hall v. Geiger-Jones Co.) upholding a Kansas statute designed to protect investors from speculative schemes with no more substance than "so many feet of blue sky." By the early 1900s, virtually every state had enacted securities laws requiring the registration of securities offerings and the licensing of securities dealers before they could solicit investors in that state.

State securities regulation preceded federal regulation by roughly two decades. The federal securities framework — the Securities Act of 1933 and the Securities Exchange Act of 1934 — was enacted after the stock market crash of 1929, building on the state law infrastructure that already existed.

The Uniform Securities Act

The Uniform Securities Act (USA) is a model law developed by NASAA (and its predecessor organizations) to standardize state securities regulation across jurisdictions. The original version was adopted in 1956. NASAA substantially revised it in 2002, and most states have adopted some version of the Act, though individual states often modify the model language.

The USA governs:

• Registration of securities: The process and requirements for registering securities offerings with the state
• Registration of persons: Requirements for broker-dealers, agents, investment advisers, and IARs to register with the state
• Fraud and prohibited practices: Standards of conduct for all securities professionals
• Administrator powers: The state regulator's enforcement authority

NASAA develops the Series 63, 65, and 66 examination content outlines based on the USA's provisions.

NSMIA: Federal Preemption of State Securities Law

The National Securities Markets Improvement Act of 1996 (NSMIA) fundamentally changed the relationship between federal and state securities regulation. Before NSMIA, a securities offering could be subject to full registration requirements in every state where it was sold — 50 separate registration processes for a national offering.

NSMIA created the category of "covered securities" — securities that are preempted from state registration requirements. States cannot require registration for covered securities, though they retain authority over fraud and can require notice filings and fees.

What Are Covered Securities?

Covered securities under NSMIA include:

1. Securities listed on a national securities exchange (NYSE, NYSE American, Nasdaq National Market, and certain other exchanges designated by the SEC). OTC Bulletin Board and Pink Sheet securities are generally not covered.

2. Securities issued by a registered investment company (mutual funds, ETFs registered under the Investment Company Act of 1940). States cannot require separate registration for mutual fund shares.

3. Securities sold in certain Regulation D offerings:

   • Rule 506(b) offerings (private placements to accredited investors and up to 35 non-accredited investors with no general solicitation)
   • Rule 506(c) offerings (general solicitation permitted; all investors must be verified accredited investors)
   • Note: Rule 504 offerings (up to $10 million) are not covered securities — states retain full registration authority over Rule 504 offerings.

4. Securities offered under certain exemptions (exchange-listed securities sold pursuant to certain senior securities, rights offerings, etc.)

State Authority That Remains After NSMIA

NSMIA preempts state registration requirements but preserves significant state authority:

Fraud Jurisdiction

States retain full authority to investigate and prosecute fraud in connection with any securities transaction, including covered securities. A broker who commits fraud while selling a Nasdaq-listed stock is still subject to state anti-fraud enforcement.

Notice Filings

States may require federal-covered IAs and issuers of covered securities (particularly Reg D Rule 506 offerings) to file notice filings — typically a copy of the federal filing (Form ADV or Form D) along with a consent to service of process and payment of a state fee.

Notice filings are administrative. States cannot deny, condition, or impose additional substantive requirements on a properly filed notice.

Fees

States may charge registration or notice filing fees even for covered securities and federal-covered advisers. The fee authority is expressly preserved by NSMIA.

State Registration for Mid-Sized Advisers

NSMIA also divided investment adviser regulation. Advisers with AUM over $110 million register with the SEC (federal-covered IAs). Advisers below $100 million register with state regulators. States retained regulatory authority over smaller advisers and their representatives.

NASAA's Role in the State Regulatory Framework

NASAA (North American Securities Administrators Association) is the organization of state securities regulators from all 50 U.S. states, the District of Columbia, and Canadian provinces. NASAA's roles include:

• Developing model rules and statements of policy under the Uniform Securities Act that states can adopt
• Creating and administering the Series 63, 65, and 66 examinations
• Publishing the prohibited practices and unethical business practices standards that define professional conduct under state law
• Coordinating multi-state enforcement actions
• Advocating for investor protection in federal legislative and regulatory proceedings

NASAA does not have regulatory authority itself — it is an association. The legal authority rests with each state's Administrator operating under that state's securities laws.

The 2002 Revised Uniform Securities Act

The original 1956 USA has been updated, and many states have adopted the 2002 Revised Uniform Securities Act. Key changes in the 2002 version include:

• Incorporation of NSMIA's federal preemption structure
• Updated definitions of investment adviser, federal-covered adviser, and IAR
• Expanded administrator enforcement tools
• Updated criminal penalties (imprisonment up to 5 years and fines up to $5,000 per violation — though some states have adopted varying penalty structures)
• Modernized provisions for electronic communications and internet-based offerings

When the Series 66 refers to the Uniform Securities Act without qualification, it generally reflects the 2002 version's framework integrated with NSMIA's preemption rules.

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Blue sky laws and federal preemption questions test the architecture of securities regulation — understanding why the rules are structured the way they are helps you apply them correctly under exam pressure. Advisor Exam Academy's Series 66 course maps the full federal-state regulatory framework and tests it with scenario questions drawn from the NASAA content outline. Start your Series 66 prep at advisorexams.com/exams/series-66.