State Securities Regulators Signal Aggressive Action To Protect and Expand Jurisdiction and Influence in Balancing Investor Protection and Capital Formation

by Robert N. Rapp

NASAA signals 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.

Excerpt:

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.

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Robert N. Rapp is a partner in the Capital Markets Regulatory, Enforcement and Litigation practice at Calfee, Halter & Griswold LLP, Cleveland, Ohio. His contributions to legal scholarship include numerous published articles addressing securities and financial market regulatory topics, many of which have been cited by state and federal courts, including the United States Supreme Court. He has served on the adjunct faculty of the Case Western Reserve University School of Law, and as Distinguished Practitioner in Residence at the Cornell Law School. Mr. Rapp is a former member of the NASD Legal Advisory Board, and is currently a public member of the Market Operations Review Committee of the Nasdaq Stock Market. He has twice served as Public Chair of the Enforcement Advisory Committee of the Ohio Department of Commerce, Division of Securities. A graduate of Case Western Reserve University (B.A., 1969) and the Case Western Reserve University School of Law (J.D., 1972), Mr. Rapp also holds a Masters of Business Administration from the Cleveland State University School of Business (1989). Mr Rapp authors Matthew Bender's Blue Sky Regulation and is a contributing author to Federal Securities Act of 1933.