Quick Answer
Federal covered securities are exempt from state registration under the National Securities Markets Improvement Act of 1996. States may still require notice filing and fees for most categories, but exchange-listed covered securities are fully preempted: no filing, no fee, no stop order. States always retain anti-fraud authority.
Federal covered securities represent a category the state cannot register at all, only monitor. Distinguishing which covered securities still owe a state notice filing from the one category that owes nothing is a frequent exam trap.
What Is a Federal Covered Security?
A federal covered security is any security that qualifies as a "covered security" under the federal-covered-securities preemption rules 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 an exchange-listed covered security
- 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.
What Are the Categories of Federal Covered Securities?
| Category | Description | State Authority |
|---|---|---|
| Exchange-listed | Securities listed on national exchanges (NYSE, Nasdaq, etc.), plus securities of the same issuer equal or senior to them | No registration, no notice filing, no fee, and no stop order. This is the only category with no state notice-filing or stop-order authority at all. State anti-fraud authority still applies, as it does to every category |
| Investment company | Securities of an investment company (mutual fund) that is registered, or that has filed a registration statement, under the Investment Company Act of 1940 | Notice filing; stop orders for non-compliance |
| Sales to qualified purchasers | Any security sold to a qualified purchaser, as defined by SEC rule. This category is defined by the buyer, not by a type of security or offering | Notice filing; stop orders for non-compliance |
| Certain other exempt offerings | Includes the larger, exchange-listed or qualified-purchaser-sold tier of Regulation A offerings and several other SEC-defined exempt-offering categories. A municipal security is the exception: it is not federal covered in the state where its issuer is located | Notice filing; stop orders for non-compliance |
| The uncapped Regulation D private-placement tier | Only this tier of Regulation D is federal covered. It is covered regardless of whether its purchasers are accredited; do not assume every offering under this tier is limited to accredited investors. Smaller-dollar Regulation D exemptions are NOT federal covered and still need state registration or a state exemption | Notice on Form D within 15 days of first sale |
What Notice Filing Can the Administrator Require?
Even though federal covered securities skip state registration, the Administrator may require a notice filing for some categories. Exchange-listed covered securities are not among them: federal law bars a state from requiring any filing or fee for those.
For investment company securities, the Administrator may require:
- Filing of documents that are part of the federal registration statement
- Consent to service of process
- Applicable fees
For the uncapped Regulation D private-placement tier:
- 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
For qualified-purchaser sales and other exempt-offering categories, the Administrator may require the filing of any document the issuer filed with the SEC for that offering, plus applicable fees.
Exam Tip: Gotchas
Only the uncapped Regulation D private-placement tier is a federal covered security, and it is covered whether or not every purchaser is accredited. Do not eliminate an answer choice just because a question mentions non-accredited purchasers in that tier. But do not extend federal covered status to every Regulation D exemption; the smaller-dollar tiers stay subject to state registration or a state exemption.
What Stop Order Authority Applies to Federal Covered Securities?
The Administrator's stop order power over federal covered securities is limited:
- For exchange-listed federal covered securities: The Administrator can NEVER issue a stop order against them, not even for fraud (though anti-fraud enforcement through other means is preserved). This category owes no notice filing, no fee, and faces no stop order
- For all other federal covered securities: The Administrator may issue a stop order suspending the offer and sale, but only if (1) the order is in the public interest, and (2) there is a failure to comply with notice filing conditions, NOT for reviewing the merits of the offering. This mirrors the same public-interest-plus-ground standard that governs stop orders on state-registered securities
Exam Tip: Gotchas
The Administrator can NEVER issue a stop order against an exchange-listed federal covered security. 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.
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 the uncapped Regulation D tier may still owe a notice filing if the Administrator imposes one.
- Remember the "qualified purchaser" category is defined by who buys the security, not by what kind of security or offering it is.
- Remember only the uncapped Regulation D tier is federal covered; smaller-dollar Regulation D offerings still need state registration or a state exemption.
- Remember NSMIA preempted state registration, not state anti-fraud authority; that authority survives for every federal covered security.
- Keep the Regulation D 15-day notice window straight, measured from the first sale in the state.
- Recall the Administrator's stop order power over non-exchange-listed covered securities reaches only notice-filing compliance, never the offering's merits.