State Antifraud Authority
This is the single most important concept in this unit, and one of the most frequently tested topics on the entire Series 66 exam. No matter what exemptions apply, antifraud provisions are always in play.
The Core Rule
States retain full antifraud authority over ALL securities transactions within their borders. This includes:
- Federal covered securities (NYSE-listed stocks, mutual funds, Rule 506 offerings)
- Exempt securities (government bonds, municipal securities, bank securities)
- Exempt transactions (private placements, unsolicited trades, institutional sales)
- Registered securities (securities that went through state or federal registration)
There is no exception. If fraud occurs in connection with the offer, sale, or purchase of any security, the state administrator has jurisdiction to investigate and take enforcement action.
What Antifraud Authority Means in Practice
The state securities administrator can:
- Investigate suspected fraud involving any security, regardless of its registration status
- Bring enforcement actions (administrative proceedings, civil actions, referrals for criminal prosecution)
- Issue cease and desist orders to stop ongoing fraudulent activity
Antifraud Provisions Cannot Be Waived
- No contract, agreement, or understanding can waive the application of antifraud provisions
- An investor cannot sign away their right to be protected from fraud
- Even sophisticated or accredited investors retain antifraud protections
Exam Tip: Gotchas
- No waiver is ever valid. If the exam describes any agreement, contract, or understanding that attempts to waive antifraud protections, the answer is always that the waiver is void and unenforceable.
The Interplay with Federal Preemption
The National Securities Markets Improvement Act (NSMIA) preempts state registration requirements for federal covered securities. But NSMIA explicitly preserves state antifraud authority.
| State Authority | Federal Covered Securities | Exempt Securities | Registered Securities |
|---|---|---|---|
| Require registration | No (preempted) | No (exempt) | Already registered |
| Require notice filing + fees | Yes | N/A | N/A |
| Enforce antifraud provisions | Yes | Yes | Yes |
Exam Tip: Gotchas
- Exempt from registration does NOT mean exempt from antifraud. This is the most frequently tested concept in this unit. Even U.S. government bonds and completely exempt transactions are subject to state antifraud authority.
- If a question asks what a state can do regarding a federal covered or exempt security, the answer almost always includes "enforce antifraud provisions."
Common Exam Scenarios
Here are the patterns the exam uses to test this concept:
Scenario 1: "A security is exempt from state registration. Can the state administrator take action if fraud is involved?"
- Answer: Yes. Antifraud authority applies to ALL securities.
Scenario 2: "A Rule 506 offering is a federal covered security. What can the state require?"
- Answer: Notice filing, fees, and antifraud enforcement. The state cannot require registration.
Scenario 3: "An investor signed a waiver agreeing not to pursue fraud claims. Is the waiver enforceable?"
- Answer: No. Antifraud provisions cannot be waived.