Federal Covered Securities
Not all securities need to go through state registration. Federal covered securities are exempt from state registration requirements, though states retain limited authority over them through notice filing.
Definition
A federal covered security is any security that is a "covered security" under Section 18(b) of the Securities Act of 1933 (SA). This category was created by the National Securities Markets Improvement Act of 1996 (NSMIA), which preempted state registration for certain securities to reduce regulatory duplication.
Key principles:
- Federal covered securities are exempt from state registration but may be subject to state notice filing requirements and fees
- The state Administrator cannot deny, suspend, or revoke registration of a Section 18(b)(1) covered security (exchange-listed securities)
- States retain anti-fraud authority over all securities, including federal covered securities
Exam Tip: Gotchas
- NSMIA preempted STATE registration, not state antifraud. States lost the ability to register federal covered securities, but they kept full authority to investigate and prosecute fraud in connection with those securities.
Categories of Federal Covered Securities
| SA Section 18(b) | Category | State Authority |
|---|---|---|
| 18(b)(1) | Securities listed on national exchanges (NYSE, Nasdaq, etc.) | Notice filing and fees ONLY; no stop orders |
| 18(b)(2) | Securities of registered investment companies (mutual funds) | Notice filing; stop orders for non-compliance |
| 18(b)(3) | Securities offered under specific SEC exemptions | Notice filing; stop orders for non-compliance |
| 18(b)(4)(D) | Regulation D private placements | Notice on Form D within 15 days of first sale |
Notice Filing Requirements
Even though federal covered securities skip state registration, the Administrator may require:
- Filing of documents that are part of the federal registration statement
- Consent to service of process
- Applicable fees
For Regulation D offerings (Section 18(b)(4)(D)):
- The Administrator may require a notice on SEC Form D
- Plus consent to service of process
- Filed no later than 15 days after the first sale in the state
Stop Order Authority
The Administrator's stop order power over federal covered securities is limited:
- For Section 18(b)(1) securities (exchange-listed): The Administrator can NEVER issue a stop order, not even for fraud (though anti-fraud enforcement through other means is preserved)
- For all other federal covered securities: The Administrator may issue a stop order suspending the offer and sale, but only for failure to comply with notice filing conditions, NOT for reviewing the merits of the offering
Exam Tip: Gotchas
The Administrator can NEVER issue a stop order against a Section 18(b)(1) security (exchange-listed). For all other federal covered securities, the Administrator's power is limited to enforcing notice filing compliance, NOT reviewing the merits of the offering. This is a fundamental limitation that the exam tests repeatedly.