On September 11, 2012, leadership of the North American Securities Administrators Association (NASAA), which is the association of state, provincial and territorial securities regulators in the United States, Canada and Mexico, signaled a newly aggressive effort to preserve and expand investor protection authority in the face of continuing pushes for preemption and marginalization of state securities regulation in the United States. In a rapidly changing regulatory environment, and faced with increasingly complex markets, state securities regulators look to enhance their position, arguing that they are the most appropriately aggressive, reasonable and unbiased securities regulator. State regulators will seek to persuade lawmakers that state securities regulation presents the best option to promote capital formation, while at the same time maximizing safe and secure investing for consumers.

Federal/State Securities Regulation

Securities regulation in the United States involves a dual federal and state structure. State “Blue Sky Laws” first emerged early in the Twentieth Century, and have from their inception been aimed at protecting main street investors from fraud and abuse in the offer and sale of securities, and policing the conduct of investment intermediaries through licensing and tough enforcement authority. Federal securities laws came later, as part of the New Deal legislative initiatives that produced, among others, the Securities Act of 1933 and the Securities Exchange Act of 1934. At the baseline, state and federal securities laws have always shared the same investor protection mission, although with very different philosophies that over time and the evolution of national financial markets produced inefficiencies and tension in the simultaneous operation of both regulatory systems.

In 1996, Congress took a major step to realign state and federal securities regulatory roles in the national market context. Congress preempted certain state authority to regulate securities offerings and transactions that are national in character, and prescribed some limits on state authority in other areas of securities regulation. Importantly, however, state enforcement authority regarding fraud, and state intermediary licensing authority, were preserved in all settings, and states retained full authority to regulate certain securities offerings, as, for example, those made in an entirely intrastate setting.

Since 1996, in the face of various efforts to further limit state securities regulatory authority, state regulators have resisted further preemption or marginalization of state securities regulation. They have done so mostly from a defensive position, emphasizing the enforcement record of state securities administrators. Preemptive federal legislation continues to be introduced, although to the extent successful, an effective balance between state and federal securities has generally been preserved. Indeed, in some cases, state regulatory authority has actually been expanded, as, for example, by federal legislation subjecting hundreds of smaller investment advisers previously regulated under federal law to primary regulation under state securities laws. Nevertheless, state securities regulators anticipate continuing preemptive legislative initiatives, and have on September 11, 2012, collectively signaled a newly aggressive stance to stem the tide.

NASAA: Adding Offense to Defense

The North American Securities Administrators Association (NASAA) is the association of state, provincial and territorial securities regulators in the United States, Canada and Mexico. Its mission is simple: Protecting investors from fraud and abuse in connection with the offer and sale of securities. NASAA supports the work of its members by coordinating multi-state enforcement actions, conducting training programs, publishing investor education materials, and both representing and presenting the views of its members on matters of securities regulation before Congress. To a large extent, NASAA has not developed and promoted its own legislative agenda, but has rather worked from a defensive position to confront efforts of others in Congress to weaken the federal/state securities regulatory structure. Now, however, NASAA has signaled a newly aggressive approach to the preservation of state regulatory authority, and to bring about a further balancing of federal and state regulations in a manner that is reasonable, efficient, and effective.

On September 11, 2012, Arkansas Securities Commissioner A. Heath Abshure was installed as the new president of NASAA at its 95th Annual Conference. Abshure called for abandonment of NASAA’s historic defensive approach to the protection of state regulatory authority. “We get aggressive,” he stated, and “We focus not only on protecting our existing jurisdiction, but utilizing our capabilities and expertise to expand our jurisdiction and influence.” His announced “offense” for NASAA and its member regulators has a clear objective:

Working together we must develop and implement a strategy that not only wards off continued pushes for preemption, but also proves to lawmakers and industry that we are the most able, competent and appropriate regulators to be the lead, if not the sole, regulator in a number of areas.

A particular concern underlying the newly aggressive stance by NASAA is the perception of state regulators that lawmakers appear willing to sacrifice reasonable regulation for perceived economic growth. Commissioner Abshure pointed specifically to the recently enacted JOBS Act as an indication that lawmakers believe that unregulated markets promote growth, when in fact reasonable regulation is essential to facilitate the investor trust necessary for economic growth and capital formation. The JOBS Act, signed into law in April 2012, contains provisions restricting state regulatory authority in the offer and sale of securities in settings in which concerns for investor protection are high, perhaps most notably in “crowdfunding.”

Striking a Balance?

Where will the newly aggressive approach of state securities regulators to preservation and expansion of their jurisdiction lead? Speaking to members, NASAA’s new President called for unified action by states to prove to lawmakers that effective state securities regulation going forward is the best option to promote capital formation while at the same time maximizing safe and secure investing for consumers. That will not be an easy task, but Commissioner Abshure pointed to one new opportunity for state regulators to craft and implement regulations to make the point. The JOBS Act addressed a little-used provision ⎯“Regulation A”⎯ under the federal Securities Act of 1933 to breathe new life into the means for limited public offerings of securities for which the aggregate offering amount does not exceed $50 million. Regulation A currently limits the offering amount to $5 million, and the JOBS Act directs the SEC to adopt what many commentators now refer to as “Regulation A+,” which will in most ways track the current requirements of Regulation A but for the substantially increased offering amount, and may be an attractive capital formation alternative for small businesses.

In the JOBS Act, Congress addressed the application of state securities laws in the Regulation A+ setting. Securities offered and sold under the new provision will not be subject to state regulation provided the securities are offered and sold on a national securities exchange, or are offered and sold only to “qualified purchasers,” as defined in the Act. Otherwise. The full scope of state registration and qualification authority under Blue Sky Laws is applicable, and in all likelihood Regulation A+ would be used by small businesses in a manner that would be subject to state regulation. States, therefore, will have to adopt rules establishing how the new form of offering will be handled in a manner consistent with both economic and regulatory objectives, and the federal/state regulatory structure. NASAA has established this undertaking as a priority for the coming year.

Shifting to offense also will require the states to develop a legislative agenda on a unified basis. At the state level, this may mean the development of new uniform laws and regulations. There is a meaningful degree of uniformity among state securities laws and regulations now, but remaining variations must be addressed, and states must be prepared to respond quickly and effectively to changing issues in financial markets on a unified basis. NASAA’s aggressive approach will likely put new emphasis on developing and presenting its own legislative agenda. Commissioner Abshure could not have made the point more clearly:

To be honest, I am tired of our members traveling to Washington to respond to someone else’s bill. I look forward to our members traveling to Washington to promote our bills.

The Future of the Federal/State Regulatory Structure

Newly aggressive united action by state regulators to preserve and enhance the scope of state securities regulation in times of increasing market complexity and a rapidly changing regulatory environment invites consideration of the future of the dual system of regulation in the United States. Calling for new initiatives not only to protect the existing jurisdiction of state securities regulators, but also to expand that jurisdiction and influence, NASAA President Abshure urged:

The securities markets are too large and too diverse for one government regulator to oversee. It is woefully shortsighted to assume that one government regulator can be the most useful resource for all broker-dealers, all investment advisers, all issuers, and all investors of any size, from the ExxonMobils to the sole proprietorships, from the Calpers to the widowed retiree on Social Security.

As “cops on the beat,” it is clear that state securities regulators have since the inception of Blue Sky Laws played a crucial role in investor protection. It is also certain that states are committed to maximizing uniformity in state and federal regulatory standards. Indeed, a considerable number of state Blue Sky Laws expressly mandate that commitment. The challenge, however, is maintaining a dual federal/state regulatory structure that does not promote regulatory turf battles. Congressional action in 1996 realigned state and federal roles in securities regulation in a manner that promotes regulatory efficiency, with the SEC and state regulators each focused on investor protection in respective ways that make sense in a national, indeed global, market setting. Aggressive new initiatives by state securities regulators to expand their jurisdiction and influence must focus on those areas where the states are in fact the most efficient, effective and appropriate regulators.