National Securities Markets Improvement Act

The National Securities Markets Improvement Act of 1996 amended US securities laws, specifically the Investment Company Act of 1940, in order to make management of mutual funds more effective, protect investors, and streamline regulations between federal and state governments. It significantly changed older systems of securities regulation at both the state and the federal level.

It allowed for “covered securities” (as defined by the NSMIA) to be exempt from state registration.

Covered Securities include:
  • Nationally traded securities or stocks, such as those on the NYSE or listed in the Nasdaq
  • Securities of a registered investment company (i.e., mutual funds)
  • and offers and sales of certain exempt securities
  • (Among the covered securities are any securities offered pursuant to S.E.C. Rule 506)

In effect, the NSMIA gave the SEC authority to regulate securities firms.

Additionally, NSMIA added new section 3(c)(7) of the Investment Company Act to create an alternative exclusion for investment companies that sell their securities solely to investors who are “qualified purchasers.”

The National Securities Markets Improvement Act of 1996 made substantial changes to the dual system of federal-state regulation while preserving state anti-fraud authority. For the first time since the New Deal, Congress modernized the relationship between federal and state securities regulators. Congress sought to make the SEC the regulator of nationally based activities, while preserving the role of states over activities that were truly local in nature. At the same time, NSMIA preserved the right of state regulators to prosecute fraud.

Registration of Securities

Among other things, the National Securities Markets Improvement Act preempts state registration and related requirements in the case of offerings of nationally traded securities and securities of registered investment companies. NSMIA amended Section 18 of the 1933 Act to provide that no state law requiring or, with respect to registration or qualification of securities or registration or qualification of securities transactions, shall directly or indirectly, apply to a “covered security.”

Broker-Dealers

The National Securities Markets Improvement Act also preempted to a limited extent state laws that addressed broker-dealer licensing, capital, custody, financial responsibility, and record-keeping requirements to the extent such conflicts differed from SEC requirements. This provision, for example, avoided the nightmare that would have occurred if every state securities authority had imposed its own unique book and records requirement on brokerage firms operating in all 50 states.

The full text of the National Securities Markets Improvement Act can be found here.

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