How State and Federal Securities Regulation Fit Together

The Uniform Securities Act is a model state law that each state can adopt to regulate securities, broker-dealers, agents, investment advisers and investment adviser representatives within its borders. Federal securities law is the set of national statutes, led by the Securities Act of 1933 and the Securities Exchange Act of 1934, that the Securities and Exchange Commission enforces across the whole country.

The two systems run side by side. A firm or individual in the securities business usually has to satisfy both, with federal law setting national standards and state law adding a local layer of registration, oversight and investor protection.

The FRC dictionary entry on the Uniform Securities Act gives the core definition. This guide compares the two systems: where each comes from, who enforces them, how the National Securities Markets Improvement Act divided the work between them, how penalties and remedies differ, worked examples, the exam traps and five practice questions.

Where This Topic Appears on the Exams

The Uniform Securities Act is the foundation of the laws, regulations and guidelines section of the Series 65, and it is the main subject of the Series 63. It also appears on the Series 66, and the Series 65 tests federal law alongside it, so candidates must know which rule comes from which system.

FRC’s Series 65 Exam Preparation course covers the Uniform Securities Act and the federal acts chapter by chapter, and the Series 65 needs no sponsoring firm. The Series 7 Exam Preparation course covers the federal rules that govern broker-dealers, and the SIE Examination Preparation course introduces the regulators and the main federal acts.

Every FRC course can be spread across interest-free monthly payments, so cost is no reason to delay. Questions that mix state and federal rules are among the hardest on the exam, and a clear map of who regulates what removes much of the difficulty.

Where State Securities Law Comes From

State securities laws are often called blue sky laws, a name linked to early efforts to stop sellers from offering investments with nothing behind them but “the blue sky.” Kansas passed the first such law in 1911, and other states soon followed.

Because each state wrote its own rules, the requirements varied widely. The Uniform Securities Act was drafted in 1956 by the body now known as the Uniform Law Commission to give states a common model they could adopt.

The 1956 Act has since been revised, but the exams are based on the 1956 Act as updated for later federal changes. The North American Securities Administrators Association, known as NASAA, writes the exams’ state law content and publishes model rules that states may adopt.

Where Federal Securities Law Comes From

Federal securities law grew out of the 1929 market crash and the Great Depression. The Securities Act of 1933 governs the issuing of new securities, requiring registration and a prospectus unless an exemption applies.

The Securities Exchange Act of 1934 governs trading in the secondary market, created the Securities and Exchange Commission and requires broker-dealers to register. FRC’s guide to the Securities Act of 1933 vs the Securities Exchange Act of 1934 explains the split in detail.

Two more statutes complete the core. The Investment Company Act of 1940 regulates mutual funds and other investment companies, and the Investment Advisers Act of 1940 regulates advisers at the federal level.

Who Enforces Each System

Federal securities law is enforced by the SEC, an independent federal agency. FINRA, a self-regulatory organization overseen by the SEC, writes and enforces rules for broker-dealers and their registered representatives.

The Uniform Securities Act is enforced in each state by the state securities regulator, which the Act calls the Administrator. The Administrator can register firms and individuals, issue rules and orders, investigate and impose sanctions within the state.

FRC’s guide to what powers the state Administrator has covers those powers in full. A key limit is that the Administrator acts only within its own state, while the SEC acts nationwide.

The Language of Each System

The two systems sometimes use different words for the same role. Under the Uniform Securities Act, an individual who represents a broker-dealer or issuer in selling securities is an agent, while FINRA and federal practice call that person a registered representative.

FRC’s guide to what an agent is under the Uniform Securities Act explains the state definition and its exclusions. Both systems use the terms broker-dealer and investment adviser, though their exclusions differ in places.

On the exam, the wording of a question often signals which system it is testing. “Administrator,” “agent” and “investment adviser representative” point to state law, while “SEC,” “FINRA” and “registered representative” point to the federal side.

What NSMIA Changed

For decades, state and federal rules overlapped heavily, and many firms had to satisfy dozens of different state requirements on top of federal law. The National Securities Markets Improvement Act of 1996, known as NSMIA, drew clearer lines between the two.

NSMIA created the category of federal covered securities, which are exempt from state registration. These include securities listed on major national exchanges, investment company securities such as mutual funds, and certain securities sold under federal exemptions such as Rule 506 of Regulation D.

FRC’s guide to what a federal covered security is explains the categories. States may still require notice filings and fees for some federal covered securities, but they cannot require full registration or review the offering’s merits.

How NSMIA Divided Adviser Regulation

NSMIA also split the regulation of investment advisers. Larger advisers, now generally those with at least $110 million in assets under management, register with the SEC and are known as federal covered advisers, while advisers below $100 million generally register with the states.

Advisers between $100 million and $110 million may choose either, and the Dodd-Frank Act of 2010 moved most mid-sized advisers to state registration. Advisers to registered investment companies register with the SEC regardless of size.

A federal covered adviser does not register with the states, but a state may require a notice filing and fee. Its investment adviser representatives must still register in any state where they have a place of business.

How NSMIA Limited State Rules for Firms

NSMIA also stopped states from imposing their own versions of certain financial and operational requirements. For broker-dealers, a state may not set net capital, custody, margin, financial responsibility, books and records or bonding requirements that differ from or add to federal requirements.

For state-registered investment advisers, a state may not impose net capital, bonding or books and records requirements beyond those of the adviser’s home state, as long as the adviser complies with its home state. This prevents an adviser with clients in several states from facing conflicting rules.

These limits do not remove state oversight. States still register broker-dealers and agents, examine firms and bring enforcement actions within their borders.

What States Keep: Antifraud Authority

NSMIA did not take away the states’ power to fight fraud. A state Administrator may investigate and bring enforcement actions for fraud or deceit in connection with any securities transaction in the state, including transactions in federal covered securities and by federal covered advisers.

This is one of the most heavily tested points on the exam. A security may be exempt from state registration, but it is never exempt from the state’s antifraud provisions.

The federal system has its own antifraud rules, including Rule 10b-5 under the 1934 Act and the prohibition on insider trading. Fraud can therefore be pursued under both systems at the same time.

Registration of Securities Under Each System

At the federal level, a new issue is either registered with the SEC under the 1933 Act or sold under an exemption. At the state level, a non-exempt security must be registered in each state where it is offered unless it is a federal covered security.

The Uniform Securities Act offers three methods of state registration. Registration by notification, often called filing, is for established issuers, registration by coordination is used alongside a federal registration, and registration by qualification is the full state review.

FRC’s guide to what registration by coordination is explains the most common method for offerings also registered with the SEC. Some offerings are entirely local and rely on the federal intrastate exemption, such as SEC Rule 147, leaving regulation to the state.

Registration of People and Firms Under Each System

Broker-dealers register with the SEC and with each state in which they do business, unless a state exclusion applies, such as having no place of business in the state and dealing only with institutions or existing clients who are not residents. Their agents register with each relevant state.

State-registered investment advisers register with their home state and with other states where they have clients, subject to the de minimis exemption. FRC’s guide to what the de minimis exemption is explains the threshold.

Registration records for both systems flow through the Central Registration Depository and the Investment Adviser Registration Depository. A single filing can serve the SEC, FINRA and the states at once, even though each regulator makes its own decision.

Penalties Under Each System

Under the Uniform Securities Act, a person who willfully violates the Act can face criminal penalties of up to three years in prison, a fine of up to $5,000, or both. The state’s criminal statute of limitations is five years.

Federal criminal penalties are much heavier. Willful violations of the 1934 Act, for example, can lead to up to 20 years in prison and fines of up to $5 million for individuals and $25 million for entities.

State and federal cases can run side by side for the same conduct. A person who defrauds investors in several states may face SEC action, criminal prosecution and separate actions by each affected state.

Civil Liability for Investors

The Uniform Securities Act gives investors a right to sue a seller who sold an unregistered non-exempt security, sold through an unregistered person or made a material misstatement or omission. The buyer can recover the purchase price plus interest at the state’s legal rate and reasonable attorney’s fees, less any income received from the security.

The investor must bring the claim within two years of discovering the violation or three years after the sale, whichever comes first. A seller can avoid the suit by making a rescission offer, offering to buy back the security on the same terms, which the buyer must accept or reject within 30 days.

Federal law provides separate civil remedies, including private claims for fraud under Rule 10b-5. An investor may have claims under both systems.

Worked Example: The Listed Stock

An agent in Ohio sells shares of a company listed on a major national exchange to an Ohio resident. The shares are a federal covered security, so they do not need to be registered with the Ohio Administrator.

However, the agent and the agent’s broker-dealer must be registered in Ohio, because the exemption covers the security, not the people selling it. If the agent misrepresents the company’s prospects, the Ohio Administrator can bring an antifraud action.

This example captures the core rule: exemption from registration never means exemption from antifraud authority or from registration of the people involved.

Worked Example: The Growing Adviser

An investment adviser based in Texas manages $60 million and registers with the Texas Administrator. Over two years, its assets grow to $130 million.

Once the adviser crosses the threshold, it generally must register with the SEC and becomes a federal covered adviser. Texas may then require a notice filing and fee, but no longer registers the firm.

The adviser’s representatives with a place of business in Texas must still register there. The Texas Administrator also keeps its authority to investigate fraud by the firm.

Worked Example: The Rule 506 Offering

A company raises money through a private placement under Rule 506 of Regulation D, selling to accredited investors in four states. The securities are federal covered securities, so no state registration is required.

Each state may require a notice filing, a copy of the federal Form D and a fee. The states cannot review the merits of the offering or block it on the grounds that it is too risky.

If the offering materials contain false statements, each state can still bring an antifraud action. The same misconduct could also lead to SEC enforcement under federal law.

The Exam Traps

The first trap is assuming a federal covered security escapes state oversight entirely. It is exempt from state registration but never from state antifraud authority.

The second trap is assuming a federal covered adviser’s representatives do not register with states. Investment adviser representatives register in states where they have a place of business, even when the firm registers with the SEC.

The third trap is mixing up the terms. “Agent” and “Administrator” belong to the Uniform Securities Act, while “registered representative” and “SEC” belong to the federal system.

The fourth trap is mixing up penalties. The Uniform Securities Act’s criminal penalties are up to three years and $5,000, far lower than federal penalties.

FRC’s guide to Series 65 ethics questions, laws and regulations exam traps covers more traps in this area. For the full list, see FRC’s guide to Series 65 exam traps and common mistakes.

A Memory Aid

Remember “federal sets the floor, states patrol the door.” Federal law sets national standards, while states register local firms and people and police fraud within their borders.

For NSMIA, add “covered from registration, never from fraud.” That single line answers most questions about how far state authority reaches.

Practice Questions

Question one: who enforces the Uniform Securities Act? The Administrator, the securities regulator in each state.

Question two: can a state require full registration of a security listed on a major national exchange? No, it is a federal covered security, though the state keeps antifraud authority.

Question three: what law created the category of federal covered securities? The National Securities Markets Improvement Act of 1996.

Question four: what is the maximum criminal penalty under the Uniform Securities Act? Up to three years in prison, a $5,000 fine, or both.

Question five: an investor wins a civil suit under the Uniform Securities Act. What can they recover? The purchase price plus interest at the legal rate and reasonable attorney’s fees, less any income received.

Get Exam-Ready

Questions comparing state and federal law reward candidates who know which system each rule comes from and where NSMIA drew the line. Once “covered from registration, never from fraud” is fixed, the hardest questions in the laws section become manageable.

The FRC dictionary is more than a dictionary. It is a library of explainer videos, written explanations and on-page quizzes covering the FINRA and SEC rules you are tested on, so you can open any term, such as SEC Rule 506, and go deeper whenever a question catches you out.

Study With FRC

FRC’s programs and memberships are open to everyone. Whether you are preparing for the Series 65, the Series 7, the SIE or a combination, structured exam preparation turns topics like the Uniform Securities Act into marks you can rely on.

FRC’s Professional Membership adds verified progress and a Digital Profile, so when you apply to advisory firms, hiring managers can see your exam progress and the knowledge you are building, not just read about it on a resume.

Your Next Step

The Uniform Securities Act is the model state law enforced by each state’s Administrator, while federal securities law is enforced nationally by the SEC. NSMIA divided the work between them, exempting federal covered securities and larger advisers from state registration while leaving states their full authority to pursue fraud.

Remember “federal sets the floor, states patrol the door,” and you will be ready for every version of this question the exam can ask.