The Uniform Law Commissioners have turned to the
subject of securities regulation four times in their history. The first
act was the Uniform Sales of Securities Act of 1930, which predates the
first major federal securities statute. Recognizing the need for state
uniformity, the Uniform Law Commissioners began their work eight years
earlier, in 1922. While a number of states had securities legislation,
few states enacted the 1930 Uniform Act.
A second Uniform Securities Act was promulgated in
1956. This model was substantially enacted in 37 jurisdictions. The
first revision of this mainstay of state securities regulation occurred
in 1985 (and some amendments were added to the 1985 Uniform Act in
1988), but the revision was enacted in only six states.
The Uniform Law Commissioners have now promulgated a
fourth uniform law, which replaces both the 1956 and the 1985 Uniform
Acts. The 2002 Uniform Act is a carefully balanced result of four years
of intensive consideration and drafting, and reflects consensus support
from most representatives of the broad array of government and private
sector interests that participated in the process. This article
describes the 2002 Uniform Securities Act.
Federal and State Law
As securities lawyers are aware, there are two
concurrent securities regulatory regimes: one at the federal level and
one at the state level. Federal regulation of securities effectively
began with Congress’ enactment of the Securities Act of 1933 and the
Securities Exchange Act of 1934, which created the SEC. These two
statutes, plus the Investment Company Act and the Investment Advisers
Act, both enacted in 1940, (and all much amended since) are still the
core federal law on securities regulation.[i]
The lack of support for the 1985 Uniform Act had
several causes: concerns about duplication of regulation, the role of
merit regulation at the state level, and the reluctance of many states
to address the subject when there was such controversy about its
provisions. Congress partially resolved this problem in the National
Securities Markets Improvements Act of 1996 (NSMIA) and the Securities
Litigation Uniform Standards Act of 1998. In NSMIA, Congress preempted
significant parts of state power to duplicate federal regulation. For
example, NSMIA prohibits a state from subjecting an offering of “federal
covered securities” to merit review and other registration
The 2002 Uniform Act is a carefully balanced result of four years
of intensive and drafting.
From 1956 through 2002, drafters of the successive
versions of the Uniform Securities Act have had to deal with the
relationship between state and federal law. Coordinating federal and
state regulation was a substantial objective for the drafters of the
2002 Uniform Act.
State Role in Securities Regulation
The states have an important role in securities
regulation. There is fraudulent activity at a level that eludes federal
regulators, even when federal law applies. And by no means are all
securities “federal covered securities.” Many schemes to defraud
investors involve locally generated pyramid schemes, misrepresentation,
and scams. Without state regulation accompanied by civil and criminal
enforcement of the law in state courts, there would be little hope of
redress for many victimized investors. State enforcement is also
available when there are fraudulent schemes involving federal covered
securities. In effect, Congress and the SEC have acknowledged that
federal regulators are unable to cope with all the enforcement that
needs to be done.
The 2002 Uniform Act is an effort to give states
regulatory and enforcement authority that minimizes duplication of
resources and blends with federal regulation and enforcement more
efficiently. Uniformity of law among the states, and coordination with
federal law, are essential for this to happen.
Elements of Securities Regulation
Securities regulation exists to prevent fraudulent
sales of securities to investors. In general, the purpose is achieved by
three methods. First, initial public offerings of securities by issuers
and control persons must be registered. Second, broker-dealers and
their agents, and investment advisers and their representatives, must be
registered. Third, fraud in securities transactions is prohibited and
enforcement powers are given to an appropriate regulatory agency. These
powers include the ability to make rules and regulations, to issue
stop-orders, to bring criminal prosecutions, and to pursue civil actions
in court. The 2002 Uniform Act addresses all three of these functions.
Registration and notice filing for securities offerings
There are three methods for dealing with public
offerings of securities under the 2002 Uniform Act: notice filing,
registration by coordination, and registration by qualification.
Notice filing under the 2002 Uniform Act is for federal covered securities other than listed securities.[iii] This
filing consists of a consent to service of process, a filing fee, and
(depending on the state securities administrator’s requirements) can
include copies of material filed with the SEC. The
2002 Uniform Act provides a platform for eventually effectuating
one-stop filing, whereby documents filed with the SEC can be
electronically filed with states within which offerings are to be made.
Offerings of securities that are not federal covered
securities must be registered at the state level (unless exempt) by
means of either coordination or qualification. The provision in the 1956
Uniform Act for registration by notification has been eliminated—both
because it has rarely been used in recent years and because most
securities to which it was applicable are now federal covered
Coordination registration at the state level is
available for securities that, even though not federal covered
securities, are registered with the SEC. These would include securities
that do not meet the listing standards of exchanges. The new
registration by coordination provision is little changed from the
original 1956 version.
The 2002 Uniform Act provides a platform for eventually
effectuating one-stop filing.
The objective of coordination is the simultaneous
registration of the offering at the SEC and in the states where the
offering is to be made. In order to facilitate coordinated registration,
the state securities administrators association has implemented a
system for coordinated review of these offerings by the states.[iv] The 2002 Uniform Act provides support for that effort.
The 2002 Uniform Act continues to permit “merit”
regulation. For the limited number of SEC-registered issues to which
merit regulation would apply, it remains inconsistent with the
disclosure model of federal registration. The 2002 Uniform Act does
require that, to the extent practicable, merit standards should be
published so as to provide notice. It is hoped that such standards would
be uniform among those states imposing merit regulation.[v]
Qualification registration at the state level applies
to all other offerings for which an exemption is not available. These
can include intra-state offerings and offerings that are exempted from
SEC registration because of their relatively small size. This provision
in the 2002 Uniform Act, including the required information content of
the state registration (which is applicable also to issues being
registered by coordination), is little changed from the 1956 Uniform
Act, except for modernizing language.
The 2002 Uniform Act, like the 1956 Uniform Act,
contains a number of exemptions from the general requirement that all
securities offerings must be registered. Some exemptions are for the
securities themselves—typically for government and municipal securities.[vi]
Other exemptions are for transactions, such as unsolicited brokerage
and limited offering transactions. In this regard, the 2002 Uniform Act
contains a revised definition of “institutional investor” that seeks
both to make uniform the varied definitions in current state laws and to
be consistent with federal law.
The 2002 Uniform Act continues to permit “merit” regulation.
It is important to recognize that all of these
exemptions are only from the registration of securities. They do not
free broker-dealers, investment advisers, agents, or investment adviser
representatives from the separate registration requirements applicable
to them. In addition, the antifraud provisions of the 2002 Uniform Act
continue to apply to anyone engaging in an exempted transaction or in a
transaction involving an exempted security.
Registration of securities professionals
The second method of securities regulation is the
registration and continued oversight of broker-dealers and their agents,
investment advisers and their representatives, and the individuals who
are agents of issuers (all defined terms in the 2002 Uniform Act). Here
again, federal and state law necessarily interact. The 2002 Uniform Act
systematizes and reorganizes the provisions dealing with these
securities professionals and coordinates them, to the extent feasible,
with federal regulation.
In NSMIA, Congress limited, in certain respects, the
state regulation of broker-dealers. In practice most broker-dealers are
required to be registered with the NASD and are regulated by both that
self-regulatory organization and the SEC. Nevertheless, under NSMIA and
the 2002 Uniform Act, they are still subject to registration with, and
antifraud enforcement, by the states. The individuals who are agents of
broker-dealers also must be dually registered, and agents of issuers
generally are required to be registered in the states. The 2002 Uniform
Act clarifies these federal-state interrelationships and promotes an
efficient coordination of dual registration and regulation in the public
interest to the benefit of both the regulators and the regulated.
NSMIA took a somewhat different tack with respect to
investment advisers and the individuals who are investment adviser
representatives. For investment advisers, Congress allocated regulatory
authority between the SEC and the states. Registration of large
investment advisers (those having assets under management in excess of
$25 million) by states was preempted and is the exclusive province of
the SEC. However, under the 2002 Uniform Act and as permitted by NSMIA,
such SEC-registered “federal covered investment advisers” are to effect
notice filings, pay filing fees, and execute consents to service of
process at the state level. Smaller investment advisers (those having
assets under management of less than $25 million) are left to exclusive
state registration and regulation.[vii]
The individuals who are investment adviser
representatives of both federal covered investment advisers and
investment advisers subject to state registration) must be registered
with the states in which they do business, unless exempted. There is no
system for federal registration of’ investment adviser representatives,
but the NASD is cooperating with the national association of state
securities regulators to create a centralized filing system for these
representatives. The 2002 Uniform Act supports such a system.
The 2002 Uniform Act contains certain clarifying
exclusions from the definitions of broker-dealer, agent, investment
adviser, and investment adviser representative, and certain exemptions
from their registration. In general, these exclusions and exemptions are
consistent with the federal statutes and with the 1956 Uniform Act.
In contrast to the 1956 Uniform Act, the 2002 Uniform
Act does not exclude banks from the definition of broker-dealer. This
follows the change in federal law in the 1999 Gramm-Leach-Bliley Act,
which adopts a “functional” regulatory approach to the oversight of bank
involvement in the securities business. Thus, banks engaging in
securities activities that are not simply intra-state are now subject to
SEC regulation of those activities, including registration as
broker-dealers, unless they engage only in specific types of
transactions that Congress believed would not implicate investor
protection problems. Congress deliberately did not preempt state law in
this area, but followed the long traditional model of concurrent federal
and state securities regulation.
The 2002 Uniform Act adopts the same functional
regulatory approach toward banks, with all but two of the types of
transactions permitted under federal law. The Uniform Law Commissioners
could see little reason for banks not to be functionally and
concurrently regulated as all other professionals are if they choose to
engage in the securities business. In fact, many banks have subsidiaries
that are broker-dealers and have placed their securities activities in
those entities, thus obviating any need for the bank itself to register
as a broker-dealer.
[T]he 2002 Uniform Act does not exclude banks from
the definition of broker-dealer.
A new provision in the 2002 Uniform Act provides
qualified immunity from defamation claims for statements in a required
report concerning terminations of employment. This is intended to
promote the complete and accurate disclosure of disciplinary problems.
The third method of securities regulation, of course,
is enforcement against anyone engaged in fraudulent practices in
securities transactions and against issuers and securities professionals
for failure to comply with the registration regimes applicable to them.
The 2002 Uniform Act continues the enforcement powers of the state
securities regulators contained in the 1956 Uniform Act with some
enhancements. Specifically, the 2002 Uniform Act:
the state securities administrator to issue, under appropriate
procedures, cease and desist orders for violations, and authorizes
courts to enforce such orders;
the state securities administrator to conduct investigations, issue
subpoenas, and provide assistance to securities regulators in other
civil liability provisions for defrauded persons to obtain damages or
rescission that are substantially the same as in the 1956 Uniform Act,
except that the statute of limitations is lengthened to be the same as
its federal counterpart.
Fraud in connection with securities is a broadly
defined term under both federal and state law, and the 2002 Uniform Act
preserves that breadth. In fact, the applicability of the antifraud
provisions has been expanded by moving some exclusions from definitions
in the 1956 Uniform Act to exemptions from registration in the 2002
Uniform Act. The antifraud provisions in the 2002 Uniform Act apply
within the state equally to state-registered entities and persons, to
federal covered investment advisers, and to anyone in connection with
transactions in any securities, including federal covered securities.
The definition of “security” largely determines the
scope of the 2002 Uniform Act. This definition tracks the definition of
“security” in federal law, with some additional explicit language to
make clear that the 2002 Uniform Act applies to uncertificated as well
as certificated securities, to interests in limited partnerships and
limited liability companies, and to investments in viatical settlements
of insurance contracts (as to which there has been evidence of abuses).
The 2002 Uniform Act also codifies a generally accepted definition of an
“investment contract,” a term included in the federal and state
definition of “security,” to assist state courts. Following federal law,
interests in pension plans subject to ERISA are excluded from the
definition of regulated under other law.
The 2002 Uniform Act, like the 1956 Uniform Act, leaves
open for resolution state-by-state whether variable annuity contracts
issued by insurance companies should be excluded from the definition of
“security.” Variable annuities, which operate like and compete with
mutual fund investments, are securities under federal law. Because the
separate accounts of insurance companies that issue variable annuities
would likely be registered with the SEC as investment companies, they
would under NSMIA be federal covered securities not subject to state
registration. Including them within the definition of security would
have the effect of making their sale subject to the notice filing and
antifraud provisions of the 2002 Uniform Act and requiring agent
registration for their sellers.
While not strictly related to enforcement, it is worth
noting that the 2002 Uniform Act contains a new provision that would
authorize the state securities administrator to develop and implement
programs for investor education, with particular emphasis on the
prevention and detection of securities fraud, The 2002 Uniform Act also
creates a Securities Investor Education and Training Fund to support
such a program; the funding of the program is left to state-by-state
determination. These initiatives recognize that financial literacy has
become increasingly important as participation in the country’s equity
markets has significantly broadened.
Coordination and Uniformity
In the NSMIA, Congress declared that its policy is to
increase federal and state cooperation in securities matters. To that
end, Congress instructed the SEC, at its discretion, to cooperate,
coordinate, and share information with state securities regulators so as
to maximize effectiveness of securities regulation, maximize uniformity
in federal and state regulatory standards, and minimize interference
with the business of capital formation. Congress made it explicit that
the policy it enunciated was not intended to be preemptive of state law.
The 2002 Uniform Act responds to this federal
initiative with a provision that contains a reciprocal instruction, in
substantially the same language, from the state legislature to its
securities administrator. Thus, upon enactment of the 2002 Uniform Act,
both federal and state regulators would have the same marching
instructions from their respective legislatures to make securities
regulation as efficient, effective, and coordinated as practicable in
the public interest and for the protection of investors. Achieving this
goal requires both federal/state coordination and uniformity among the
states. The 2002 Uniform Act provides a platform for meeting these conditions at the state level.
Organization of the 2002 Uniform Act
The 2002 Uniform Act contains seven Articles:[viii]
1. General Provisions, consisting of five sections, including the definitions section.
2. Exemptions from Registration of Securities, consisting of four sections.
3. Registration of Securities and Notice Filing of Federal Covered Securities, consisting of seven sections.
Agents, Investment Advisers, Investment Adviser Representatives, and
Federal Covered Investment Advisers, consisting of twelve sections,
including registration and notice filing sections and exemption
5. Fraud and Liabilities, consisting of ten sections.
6. Administration and Judicial Review, consisting of twelve sections.
7. Transition, consisting of three sections.
To date, the 2002 Uniform Securities Act as approved by
the Uniform Law Commissioners has received the endorsement of the North
American Securities Administrators Association and the Securities
Industry Association. The Council of the Section of Business Law has recommended approval of the Act by the American Bar Association. Introductions of the Act in the state legislatures will begin this year.