Reflections on Dual Regulation of Securities: A Case for Reallocation of Regulatory Responsibilities

When Congress passed the National Securities Markets Improvement Act of 1996 (NSMIA), it unilaterally withdrew the preexisting power of the states to require pre-sale registration disclosures by issuers, including the power to conduct pre-sale disclosure review, merit review, or any other kind of fairness review in connection with most public and private offerings of securities conducted within the various states’ respective jurisdictions. It simply rewrote the 1933 Act’s savings clause to preempt most state laws requiring registration of, or imposing conditions on, a broadly-defined and open-ended group of securities and securities transactions. The passage of NSMIA inflicted a severe, if not fatal, wound on the dual system of securities regulation that had protected investors and their marketplace since the end of the Great Depression. This essay suggests an alternative approach that might contribute to the development of a more rational reallocation of state regulatory power than presently exists in NSMIA’s aftermath. First, the author addresses the remaining scope of state regulatory power given NSMIA’s dictates and prerogatives. Then, the author suggests for consideration significant alterations to the regulatory role traditionally performed by the states. These alterations include state withdrawal from the registration process, with the consequential demise of merit review, and, in its place, the development of a notification procedure accompanied by state criminalization of violations of both federal registration and state notification requirements. The author also suggests the adoption of corollary civil remedies to ensure supportive private reinforcement of the new regime. Finally, the author concludes that this reallocation of regulatory responsibility will realign the dual system of securities regulation to better achieve NSMIA’s elusive goal of regulatory uniformity. This suggested reallocation should serve the statutory policy of the Uniform Securities Act, that its interpretation be coordinated with the federal securities laws.