 Welcome to the subunit on state securities law. Securities regulation actually began with the states rather than the federal government in the United States. And this law is referred to as blue sky law. Blue sky law. So the first blue sky law was adopted in Kansas in 1911. If you take a look at the picture shown here with the blue sky, lovely blue sky, the reference comes from several court cases, but mainly one case on the federal level that became famous known as Hal V. Geiger-Jones. And the judge in that case said the name that is given to the law indicates the evil at which it is aimed. That is to use the language of a cited case speculative schemes which have no more basis than so many feet of blue sky. So blue sky law is the oldest securities law in the United States. And soon after Kansas adopted in 1911 as we mentioned, soon after that blue sky laws were adopted throughout the United States. And what do blue sky laws require? Well, essentially they require the approval of the securities regulators before offering securities. It's a pretty simple concept. You want to have some sort of approval before someone can come in and sell securities like stocks, bonds, interest in oil and gas, that sort of thing in your state. Now in contrast to the focus on the federal level which is disclosure, most states though not all also conduct what are known as merit reviews. Merit reviews of securities filings. In other words, it's not enough to disclose the conflicts in the offering or material information in the offering. The offering can't be unfair or unjust and there has to be an expectation of a fair return. So this is what most state securities regulators are looking for when they review offerings. In addition, sellers must be registered or licensed when they're selling securities. And blue sky laws also include the authority to bring enforcement actions against perpetrators of securities, fraud and other violations. So there's enforcement authority. And again, particularly with regard to fraud. So let's take a look at the role of states in securities regulation and you might want to be asking yourself what would be the benefits of dual regulation. Many of us in America and the United States are familiar with our federal system where the states have power and the federal government has power. Some of you may not be familiar with the federal system. But in the United States we have, at least in terms of securities, a system of dual regulation where there's regulation by states and fed. Dual regulation. So what would be the benefits? Well, when Congress enacted the Securities Act of 1933, you may remember this from our unit on federal securities law. Securities Act of 1933, it specifically preserved the authority of the states. So we have the system of dual regulation with regard to securities in the United States. In fact, at this point, outside of the federal government, there are 54 state and territorial regulators of securities. So you have a federal regulator and a few layers of federal regulation as well as 54 state and territorial regulators of securities. So in the U.S., this means securities regulation and enforcement activities can be adequately addressed at the local as well as the national level. However, state securities regulation is by no means local in scope and state securities regulators have been involved in significant securities enforcement cases with national impact. And state regulators often work with the SEC and other federal regulators. So there's a lot of overlap, there's a lot of cooperation, a lot of working together. Now, these are some of the benefits that we see here, the benefits of having essentially cops on the beat watching things, the benefits of having a very comprehensive system. But you might want to ask yourself, well, what are some of the drawbacks and how are those handled? Well, you can imagine that with 54 local regulators and in combination with federal regulators, there might be a lot of confusion and chaos if there's not uniformity. To address that, the Uniform Securities Act was adopted, the most prevalent version of this act is the act of 1956. So the Uniform Securities Act of 1956 is the most prevalent, there are other versions. And the 1956 act really kind of brought state securities regulation into the modern era. I went further than any previous act in spelling out how securities should be regulated on the state level. Its purpose was to make uniform, to make uniform the law of the states which enacted and to coordinate between the states and federal regulators. Specifically, the purpose is to make uniform the law of those states which enacted and to coordinate the interpretation and administration of this act with the related federal regulation. So let's take a closer look at the 1956 act and what it does as well as the variations that came later. So the Uniform Securities Act and its different version, also known as the USA, Uniform Securities Act provides for, as we've mentioned before, enforcement. So state regulators can enforce against fraud and other misleading activities of people who offer, sell, buy, provide advice regarding securities. It also requires registration of securities offerings. In addition to registration of securities offerings, it also requires the registration or licensing of broker dealers. People actually sell securities and investment advisors. Also requires the registration or licensing of the agents of these groups or of these companies. Detailed situations in which regulators can deny, suspend, or revoke licenses and registrations. It provides explicit authority for state securities regulators to conduct investigations and as part of their investigatory power to issue subpoenas and cease and desist orders and bring enforcement actions for violations of the act. Lastly, all of these investigations and actions would have no matter whatsoever if there were not penalties to back them up. So there are penalties provided for violations of the act. So the 56 act has been the most successful version of the Uniform Act so far. And a version of it is still in use by majority of the states. There were new Uniform Acts drafted in 1985 and 2002 to deal with changes in securities regulation over the years. But the essentials of blue sky law remain, registration and enforcement. Alright, so let's just take a look here. Just take a look here at some other changes that have taken place. The federal government obviously has an interest in ensuring uniformity. And the states have made their efforts through the Uniform Act. But sometimes that's not enough and each state can kind of go its own way a little bit. Because of that concern in 1996, Congress passed the National Securities Markets Improvement Act, also known as NISMIA, the National Securities Markets Improvement Act. And NISMIA, in 1996, Congress significantly changed the structure of securities regulation in the United States. It had always been a very dual regulatory sort of system. That changed in 1996 where Congress cut the state out of certain areas. Prior to adoption of NISMIA, there was an overlapping role in just about all areas for state and federal securities authorities. In 1996, under NISMIA, Congress decided to preempt the state's authority in certain areas, in significant areas. And preempt means that Congress decided that it had the authority and the sole authority to regulate that area and would exercise sole authority in certain areas. So in 1996, regulation of investment advisors was split with large investment advisors being handled by the federal government and small investment advisors being handled by state governments. In addition to that, Congress created a class of covered securities, which the federal government, the SEC, had the exclusive authority to regulate and the states could not regulate. These would include things like mutual funds, private offerings, where there's not an offering made to the public on a stock exchange. And also, securities offered on a large recognized exchange, like the New York Stock Exchange. So no longer would states have the authority to regulate those types of offerings. However, states still retain the power to investigate fraud and to bring action related to fraud against any type of securities fraud, no matter who the primary regulator is. So you might want to ask yourself, dual regulation, has it been good? Has it been bad? Is it a mixed system? Important questions that people are constantly asking themselves in the securities world. But it's important to remember that states still play an important role in the United States in securities regulation in a comprehensive system of dual regulation.