Quick Answer
A federal covered security is preempted from state registration entirely by federal law under the National Securities Markets Improvement Act, not exempted under the USA's own provisions. States cannot require registration but, except for exchange-listed securities, can require notice filings and fees. States always keep full antifraud authority.
Federal covered securities are a closely related but distinct concept from USA-exempt securities: the preemption source is federal, not state, and the notice-filing and stop-order rules differ sharply by category.
What Are Federal Covered Securities?
A federal covered security is any security that qualifies as a "covered security" under the Securities Act of 1933's federal-covered-securities preemption. This category was created by the National Securities Markets Improvement Act of 1996 (NSMIA).
Key principles:
- NSMIA preempted state registration for certain categories of securities
- States cannot require these securities to be registered; only the SEC regulates their registration
- States retain the authority to require notice filings and fees, but only for some categories. Exchange-listed covered securities are the exception: federal law bars a state from requiring any filing or any fee on them
- States retain full antifraud enforcement authority
Federal covered securities are not registered at the state level; they are exempt from state registration by federal law.
What Are the Categories of Federal Covered Securities?
| Category | Description |
|---|---|
| Listed securities | Securities listed, or authorized for listing, on a national securities exchange (NYSE, Nasdaq, etc.) or securities of the same issuer of senior or substantially equal rank |
| Investment company securities | Securities issued by an investment company (mutual fund, unit investment trust) that is registered, or that has filed a registration statement, under the Investment Company Act of 1940 |
| Qualified purchaser offerings | Securities offered or sold to "qualified purchasers" as defined by SEC rule. This category is defined by the buyer, not by a type of security or offering |
| Certain other exempt offerings | Includes the larger, exchange-listed or qualified-purchaser-sold tier of Regulation A offerings (Tier 2, not Tier 1), plus most securities that are exempt from federal registration under the Securities Act's own general exempt-securities list (government, bank, and insurance-type issuers, and similar). Three categories on that federal list stay OUTSIDE federal covered status: nonprofit-issuer securities, fairness-hearing reorganization exchanges, and intrastate offerings. A municipal security is also an exception: it is not federal covered in the state where its issuer is located |
| Regulation D private placements | Only the uncapped, unrestricted-offering-amount tier of Regulation D is federal covered, and it is covered whether or not every purchaser is accredited. The smaller-dollar, capped-offering-amount tier is NOT federal covered and still needs state registration or a state exemption |
Exam Tip: Gotchas
- Federal covered is not the same as USA-exempt. A federal covered security is preempted by federal law from state registration, but for most categories the state can still require notice filings and fees. An exempt security under the USA's exempt-securities provisions is exempt under the USA itself.
- Exchange-listed is the one category the state cannot touch at all. No notice filing, no fee, no stop order. An answer choice letting the Administrator demand a filing or a fee on NYSE-listed or Nasdaq-listed stock is wrong.
What Notice Filing Can the Administrator Require?
Although states cannot require registration, the Administrator may require certain filings depending on the category. The category controls, and one category is off-limits entirely:
Exchange-listed securities:
- Nothing. No filing, no fee, no stop order. Federal law forecloses state authority here completely, and this carve-out reaches securities of the same issuer that are equal or senior to the listed security
Investment company securities (mutual funds and UITs):
- Filing of all documents that are part of the federal registration statement
- Consent to service of process
- A fee
- Required both before the initial offer and for subsequent amendments
The uncapped Regulation D private-placement tier:
- Filing of a notice on SEC Form D
- Consent to service of process
- A fee
- Filed no later than 15 days after the first sale in the state
Qualified purchaser offerings and other SEC-exempt offering categories:
- Filing of any document filed with the SEC
- A fee
- This route reaches the qualified-purchaser and other-exempt-offering categories only. It does not reach exchange-listed securities
Exam Tip: Gotchas
Only the uncapped tier of Regulation D is federal covered, and it stays covered even if a purchaser is not accredited. Do not eliminate an answer choice just because a question mentions non-accredited purchasers in that tier. The smaller-dollar, capped tier is never federal covered; it still needs state registration or a state exemption.
Notice filing is not registration: it is a reporting and fee requirement only. The Administrator does not review the merits of the offering.
What Stop Order Authority Applies to Federal Covered Securities?
The Administrator's stop order power is limited and varies by category:
| Category | Stop Order Authority |
|---|---|
| Exchange-listed | No stop order authority (fully preempted) |
| Investment companies | Yes: stop order for failure to comply with notice filing conditions |
| Qualified purchaser / other exempt offerings | Yes: stop order for failure to comply with notice filing conditions |
| Uncapped Reg D private placements | Yes: stop order for failure to comply with notice filing conditions |
For a stop order to be issued against a federal covered security (other than exchange-listed), both conditions must be met:
- The order is in the public interest, AND
- There is a failure to comply with any notice-filing condition the Administrator has imposed (e.g., failure to file notice or pay fee)
Exam Tip: Gotchas
- The Administrator can never issue a stop order against exchange-listed federal covered securities. These are the most fully preempted category; the state can only enforce antifraud.
- For other federal covered securities, stop orders are limited to notice filing non-compliance.
What Waiver Authority Does the Administrator Have?
The Administrator may by rule or order waive any or all of the federal-covered-securities notice-filing provisions. This gives the Administrator flexibility to reduce notice filing burdens when appropriate.
What Should You Check on Exam Day?
- Identify the category first: exchange-listed securities are fully preempted, while investment company, qualified-purchaser-sold, other exempt-offering, and uncapped-Reg-D securities may still owe a notice filing if the Administrator imposes one.
- Only the uncapped Regulation D tier is federal covered; the smaller-dollar, capped tier still needs state registration or a state exemption.
- A municipal security otherwise covered under the exempt-offerings category is not federal covered in the state where its own issuer is located.
- The Administrator's stop order power over non-exchange-listed covered securities reaches only notice-filing compliance, never the offering's merits.
- Federal covered status is a federal preemption question, not a USA exemption question; do not confuse it with the USA's own exempt-securities list.