The National Securities Markets Improvement Act (NSMIA)

Instructor: Byron Yee

Byron has over 5 years of experience in banking and investments and is currently a Candidate for the Chartered Financial Analyst (CFA) Institute. He also is registered with FINRA Series 7 and 66 and has his Life & Disability Insurance producers license for WA state. Previous to his career in banking, he spent 2 years in West Africa as a Peace Corps Volunteer and 4 years in China as an English teacher and financial analyst. Byron double majored in Theatre Arts and Business Administration at Western Washington University. In his free time he enjoys hiking, cycling, running, and being in the great outdoors with his family.

This lesson provides the background history leading up to and the creation of the NSMIA laws. We then discuss how these laws apply to the opening lesson scenario.

Conflicting Laws at Different Levels

Joshua is an investment banker at Company ABC and is responsible for preparing a new security to be issued in the markets. He is confused about some of the differences between local stated and federal laws and is unsure which set of laws to follow. Three months after the securities hit the public markets, the federal government accuses Joshua and Company ABC of violating federal securities laws, however the firm's legal team argues that their actions are perfectly compliant under local state laws.

This scenario is slightly exaggerated to make a point that federal versus state security laws are confusing. We first cover some background history, which led to establishing the National Securities Markets Improvement Act.

Background History

Before we dive into the main content of this lesson, it is important to put some history and context into place so you can better understand how this law came about.

First, the Investment Company Act of 1940 used to be the overarching set of laws guiding regulation for the trading of securities. This act along with the Securities Exchange Act of 1936 created the Securities Exchange Commission (SEC) and gave it federal authority to establish and enforce securities trading rules. Over the years, the SEC realized that many traders had found loopholes in federal laws so the U.S. government passed the Uniform Securities Act, which granted each state the power to create and enforce additional securities laws.

However, the state and federal laws were, by nature, not always consistent, which led to very complex and complicated rules for processing securities registrations as well as proper law enforcement. For example, like Joshua in the opening scenario, a company that wanted to issue bonds available to state residents had to register this security with the state. But later if they wanted to make these bonds available to investors nationwide, they had to re-register with the SEC because their laws and administrative processes were slightly different. Finally, if certain violations were discovered at both the federal and state levels, then it was confusing as to which authority took the lead on any investigations.

Streamlining the Process

To directly address some of the complications and conflicts between state and federal securities laws, the government created the National Securities Markets Improvements Act (NSMIA) in 1996. This law was established to streamline both the initial registration process and clarify which authoritative figure had priority in a case with conflicts between federal and state law. The details of this law can be broken down into two sections:

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