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Difficulty: MediumState Securities Regulators and Blue Sky Laws

An open-end investment company registered under the Investment Company Act of 1940 plans to distribute its shares to retail investors in multiple states. Which of the following statements correctly describes the authority of state securities regulators regarding these shares under state Blue Sky laws?

  1. State securities regulators cannot require full state registration of the shares, but they may require notice filings, consent to service of process, and filing fees.Answer
  2. B
    State securities regulators retain full statutory authority to require the mutual fund to undergo state registration by qualification before offering shares in their respective states.
  3. C
    Because the mutual fund is registered with the SEC, state securities regulators lose all jurisdiction, including the ability to enforce anti-fraud provisions within their state.
  4. D
    Federal registration automatically satisfies all state legal obligations, eliminating the legal authority of states to require any notice filings or administrative fee payments.

Answer

State securities regulators cannot require full state registration of the shares, but they may require notice filings, consent to service of process, and filing fees.
Under the National Securities Markets Improvement Act (NSMIA), securities issued by registered investment companies (such as mutual funds) are federal covered securities. State regulators are preempted from requiring full state registration (such as registration by qualification), but Blue Sky laws permit states to require notice filings, consent to service of process, and payment of state filing fees.

Step-by-Step Solution

1
Identify the classification of the security under federal and state securities laws.
Investment company shares registered under the Investment Company Act of 1940 are classified as federal covered securities under NSMIA.
Federal covered securities are subject to primary SEC regulation and are preempted from full state-level registration demands.
2
Determine remaining state administrative authority over federal covered securities under Blue Sky laws.
State regulators cannot compel full registration, but they can require notice filings, state filing fees, and consent to service of process.
NSMIA preserved state administrative rights to collect notice filings and fees while prohibiting states from requiring substantive security registration.

Key Concept

Notice Filing and State Jurisdiction over Federal Covered Securities
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Topics

State Securities Regulators and Blue Sky Laws

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