With the exempt securities categories covered, let's turn to a closely related but distinct concept: federal covered securities. These are not "exempt" in the traditional Uniform Securities Act (USA) sense; they are preempted from state registration entirely by federal law.
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 offering
- States retain the authority to require notice filings and fees
- 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.
Categories of Federal Covered Securities
| Category | Description |
|---|---|
| Listed securities | Securities listed 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 investment companies (mutual funds, unit investment trusts (UITs)) registered under the Investment Company Act of 1940 |
| Qualified purchaser offerings | Securities offered or sold to "qualified purchasers" as defined by SEC rule |
| Regulation D private placements | Securities sold in certain SEC-exempt transactions, including the large-issuer/accredited-investor private placement tier of Reg D |
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 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.
Notice Filing Requirements
Although states cannot require registration, the Administrator may require certain filings depending on the category:
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
Regulation D offerings (private placements):
- 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 and other federal covered offerings:
- Filing of any document filed with the SEC
- A fee
Notice filing is not registration: it is a reporting and fee requirement only. The Administrator does not review the merits of the offering.
Stop Order Authority Over 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 |
| Reg D offerings | 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.
Waiver Authority
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.