Which Securities States Cannot Register, the Powers States Keep, and How the Exam Tests the Difference

A federal covered security is a security that states cannot require to be registered under their own securities laws. Federal law takes over the registration question, so the issuer deals with the Securities and Exchange Commission or relies on a federal exemption, and the states are limited to notice filings, fees and enforcing their antifraud rules.

The main examples are securities listed on major national exchanges, shares of registered investment companies such as mutual funds, and securities sold in certain federally exempt offerings, including private placements under Rule 506 of Regulation D. The category was created by the National Securities Markets Improvement Act of 1996, known as NSMIA.

This guide covers where the concept comes from, which securities qualify, what states can and cannot do, how it compares with state registration, worked examples, the exam traps and five practice questions. For the same idea applied to advisers, FRC’s guide to what the de minimis exemption is explains how federal covered advisers are treated by the states.

Why Federal Covered Securities Exist

Before 1996, a company selling securities across the country often had to register with the SEC and with every state where it sold. Each state could apply its own standards, and some reviewed whether an offering was fair to investors, not just whether it was properly disclosed.

That patchwork added cost and delay without much benefit for the largest and most heavily regulated offerings. A share already listed on a national exchange, or a mutual fund already registered with the SEC, gained little from 50 separate reviews.

NSMIA drew a dividing line. For certain securities, registration became a federal responsibility only, while states kept their power to collect fees, require notices and pursue fraud.

Where This Topic Appears on the Exams

Federal covered securities appear in the laws and regulations section of the Series 65, alongside the methods of state registration and the exemptions in the Uniform Securities Act. They are also tested on the Series 63 and Series 66.

FRC’s Series 65 Exam Preparation course covers securities registration under state and federal law, and the exam requires no sponsor. The SIE Examination Preparation course introduces the federal securities laws and the regulators that apply them.

Every FRC course can be spread across interest-free monthly payments, so cost is no reason to delay. Federal covered securities come down to a short list of categories and a few key powers, which makes them dependable marks once learned.

The Main Categories of Federal Covered Securities

The first category is listed securities. Securities listed, or authorised for listing, on the New York Stock Exchange, the Nasdaq Global Market and other national exchanges with similar listing standards are federal covered, along with other securities of the same issuer that rank equal to or senior to them.

The second category is securities issued by investment companies registered under the Investment Company Act of 1940. This includes mutual funds, exchange-traded funds, unit investment trusts and registered closed-end funds.

The third category covers securities sold in certain exempt offerings and transactions under federal law. The most tested examples are private placements under Rule 506 of Regulation D and Tier 2 offerings under Regulation A, which are sold to what the SEC defines as qualified purchasers.

Exempt Securities as Federal Covered Securities

Many securities that are exempt from registration under the Securities Act of 1933 are also federal covered. These include US government securities and certain other exempt categories listed in Section 3(a) of that act.

Municipal securities are a special case. A municipal bond is a federal covered security in every state except the state where the issuer is located.

That means a state can apply its own rules to municipal bonds issued within its borders. A bond issued by a city in Ohio is federal covered in Indiana and Michigan, but not in Ohio itself.

What States Can Still Do

States cannot require a federal covered security to be registered, and they cannot review its merits. However, they keep three important powers.

The first is notice filing. A state can require the issuer to file a copy of documents already filed with the SEC, such as the registration statement for a fund or Form D for a Rule 506 private placement.

The second is fees, and the third is enforcement. States can charge filing fees and can investigate and bring actions against fraud or deceit in the sale of any security, including federal covered securities.

Notice Filing in Practice

Notice filing requirements differ between categories. Registered investment companies typically make notice filings in each state where their shares are sold, along with annual renewals and fees.

For Rule 506 offerings, the issuer files Form D with the SEC within 15 days after the first sale. States commonly require a copy of Form D and a fee, filed within 15 days of the first sale in that state.

Securities listed on a national exchange generally do not require notice filings at all. The exchange listing, and the SEC registration behind it, is treated as enough.

What Is Not a Federal Covered Security

The exam often tests what falls outside the category. Securities traded only in the over-the-counter market, such as many penny stocks, are not federal covered, because they are not listed on a qualifying exchange.

Offerings under Rule 504 of Regulation D are not federal covered. Neither are intrastate offerings under Rule 147, which are designed to be regulated by the state where the issuer and investors are based.

FRC’s guide to Regulation D Rule 504 vs Rule 506 explains why the two rules are treated so differently. The key point for the exam is that Rule 506 is federal covered and Rule 504 is not.

How Non-Covered Securities Are Registered With the States

A security that is not federal covered must be registered in each state where it is sold, unless a state exemption applies. The Uniform Securities Act provides three main methods.

Registration by notification, also called filing, is available to established issuers with a track record. Registration by coordination is used when the issuer is registering the same offering with the SEC at the same time, and it becomes effective in the state when the federal registration becomes effective.

Registration by qualification is the full state review. It applies when the other methods are not available, and it allows the state Administrator to examine the offering in detail before it can be sold.

Federal Covered Securities and Federal Covered Advisers

The same idea applies to investment advisers. A federal covered adviser is one registered with the SEC, and states cannot require it to register, although they can require notice filings and fees.

The parallel is useful for the exam. In both cases, the federal regulator handles registration, the states keep notice filing and fee powers, and the states keep the power to pursue fraud.

The difference is that advisers also have a de minimis standard, while securities do not. A security is either federal covered or it is not, regardless of how many investors buy it in a state.

The Security Is Covered, the Salesperson Is Not

One of the most important points about federal covered securities is what they do not cover. The label applies to the security itself, not to the people who sell it.

An agent selling a federal covered security in a state must still be registered as an agent in that state, unless the agent qualifies for a separate exemption. A broker-dealer must still be registered there too, and an investment adviser recommending the security must still meet its own registration requirements.

This is a classic exam question. A candidate who reads that a mutual fund is federal covered may assume the agent selling it needs no state registration, but registration of the person and registration of the product are two separate questions.

Exempt Securities, Exempt Transactions and Federal Covered Securities

The Uniform Securities Act has its own list of exempt securities and exempt transactions, and these overlap with federal covered securities without being identical. An exempt security never needs state registration because of what it is, such as a government bond or a bank security.

An exempt transaction removes the registration requirement because of how the sale is made, such as a sale to an institutional investor or an isolated non-issuer transaction. The same security might need registration in one sale and not in another.

A federal covered security is different again, because the exemption from state registration comes from federal law rather than from the state’s own statute. When answering an exam question, it helps to ask which of the three routes applies, because each one leaves the state with different powers.

How NSMIA Changed the Market

NSMIA did more than create federal covered securities. It also split the regulation of investment advisers between the SEC and the states, so that larger advisers registered federally and smaller advisers registered with the states.

The aim in both cases was the same. Federal regulation would cover the largest and most national activities, while states would focus on smaller, local offerings and advisers where their knowledge of local markets is most useful.

The result is the system candidates study today. Federal registration and state notice filing work together, and state securities regulators remain the front line for fraud affecting their residents.

Worked Example: A Listed Company

A technology company’s shares are listed on Nasdaq. It sells new shares to the public in a registered offering, and investors in all 50 states buy them.

Because the shares are listed on a qualifying national exchange, they are federal covered securities. No state can require the offering to be registered or review its terms.

If a broker in Texas uses false statements to sell the shares, the Texas Administrator can still act. The antifraud power applies to every security, federal covered or not.

Worked Example: A Private Placement

A start-up raises $8 million from accredited investors in California and Florida using Rule 506(b). It files Form D with the SEC within 15 days of the first sale.

The securities are federal covered, so neither state can require registration. Both states can require a copy of Form D and a filing fee as a notice filing.

If the start-up had instead used Rule 504, the securities would not be federal covered. It would need to register in each state or find a state exemption.

Worked Example: A Municipal Bond

A school district in Georgia issues bonds. An agent sells some to investors in Georgia and some to investors in Alabama.

In Alabama, the bonds are federal covered securities, so Alabama cannot require registration. In Georgia, the bonds are not federal covered, because Georgia is the issuer’s own state.

Georgia’s own law will usually exempt its municipal bonds from registration anyway. The exam point is the federal covered label, not whether registration is ultimately required.

The Exam Traps

The first trap is believing states lose all power over federal covered securities. States cannot require registration or review merits, but they keep notice filing, fees and antifraud enforcement.

The second trap is the Regulation D split. Rule 506 offerings are federal covered, while Rule 504 offerings are not.

The third trap is municipal bonds, which are federal covered everywhere except the issuer’s own state. The fourth trap is assuming any traded stock is federal covered, when penny stocks traded only over the counter are not.

The fifth trap is assuming that a federal covered security removes the need for agent or broker-dealer registration. The security is covered, but the people selling it must still be registered in the state unless they have their own exemption.

FRC’s guide to Series 65 ethics and laws questions and 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 “listed, funds and 506.” Those are the three federal covered categories that appear most often on the exam.

For state powers, remember “notice, fees and fraud.” Those are the three things a state can still do with a federal covered security.

Practice Questions

Question one: a company’s shares are listed on the New York Stock Exchange. Can a state require them to be registered? No, they are federal covered securities.

Question two: is a Rule 506 private placement a federal covered security? Yes, although states can require a notice filing of Form D and a fee.

Question three: a municipal bond issued in Ohio is sold to an Ohio resident. Is it a federal covered security in Ohio? No, municipal bonds are not federal covered in the issuer’s own state.

Question four: can a state Administrator take action against fraud in the sale of a mutual fund? Yes, states keep antifraud authority over federal covered securities.

Question five: a penny stock trades only over the counter. Is it a federal covered security? No, it must be registered in the state or qualify for a state exemption.

Related Questions

Federal covered securities are one half of the dividing line between federal and state securities law. FRC’s guide to the Securities Act of 1933 vs the Securities Exchange Act of 1934 explains the federal laws behind that line.

Get Exam-Ready

Federal covered security questions reward candidates who know the categories and the powers states keep. Once the listed, funds and Rule 506 categories are clear, along with the municipal bond and Rule 504 exceptions, these become some of the most dependable marks on the exam.

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 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 SIE or both, structured exam preparation turns topics like securities registration into marks you can rely on.

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

Your Next Step

A federal covered security is one that states cannot require to be registered, including listed securities, registered investment company shares and Rule 506 private placements. States keep the power to require notice filings, charge fees and enforce their antifraud rules.

Remember “listed, funds and 506,” and “notice, fees and fraud,” and you will be ready for every version of this question the exam can ask.