Notice Filing

Fallbrook Analytics is conducting an offering to accredited investors under Rule 506 of Regulation D and will sell to residents of State N. The State N Administrator writes demanding that the company register the offering in the state and submit to a merit review of the terms. What is the correct position?

1. A.The Administrator is correct, because a state may always require registration of any offering sold to its own residents.Incorrect. NSMIA makes Rule 506 securities covered securities and preempts state registration and merit review of the offering.
2. B.The Administrator may not require registration or merit review of a Rule 506 covered security, but may require a notice filing and a fee and retains full antifraud enforcement authority.Correct. Preemption is limited to registration and merit review; notice filings, fees and antifraud jurisdiction survive.
3. C.The state has no authority of any kind over the offering, so it may not require a notice filing, charge a fee or investigate fraud.Incorrect. It overstates preemption. Notice filings, fees and antifraud authority are expressly preserved to the states.
4. D.The Administrator may not require registration, but only because the purchasers are accredited investors rather than because the security is covered.Incorrect reasoning. Preemption follows from the securities being covered securities under NSMIA, not from the status of the purchasers.

Why: Securities sold in a Rule 506 offering are covered securities under the National Securities Markets Improvement Act. Congress made federal regulation exclusive for that category, so a state may NOT require registration of the offering or subject its terms to a merit review. The Administrator demand is therefore beyond his authority as stated. States are not, however, cut out entirely. They retain three specific powers over covered securities. They may require a NOTICE FILING, typically a copy of the Form D filed with the SEC together with a consent to service of process, they may charge a filing FEE, and they retain full authority to investigate and bring enforcement actions for FRAUD or deceit in connection with the offering. Preemption is therefore about registration and merit review only; it is not a general immunity from state law. Separately, the persons selling the offering may still need to be registered in the state as broker-dealers or agents unless an exclusion applies to them.

A federal covered investment adviser interacting with a state generally:

1. A.Registers with FINRAFINRA is the self-regulatory organization for broker-dealers and their registered people. Investment advisers do not join it, and a federal covered adviser's registration is with the SEC, with at most a notice filing at the state level.
2. B.May need to make a notice filing rather than registerCorrect - notice filing, not registration.
3. C.Is completely unregulated by the stateThis reads preemption too broadly. What the state gives up is the power to require registration of the adviser, not its authority over fraud, and states may also require a notice filing with fees and consent to service of process, so real state involvement remains.
4. D.Must fully register in the stateThis ignores the division of labor that federal covered status creates. Once an adviser falls on the federal side of the line, the state may not impose its own registration on top; the notice filing exists precisely as the lighter substitute for full state registration.

Why: Federal covered advisers register with the SEC and are not state-registered, but a state may require a notice filing.

State securities registration requirements generally do NOT apply to:

1. A.All common stockThe kind of security is not the criterion. Common stock of a large listed company is federal covered, while common stock of a small local company is not, so the label cannot decide the question.
2. B.Private startupsThere is something to this, since certain private offerings do reach federal covered status through a specific federal exemption. The category itself is not what matters, though. Being a private startup does not confer covered status; the particular exemption the offering is sold under does.
3. C.Federal covered securitiesCorrect - NSMIA preempts state registration of covered securities.
4. D.Limited partnershipsChoice of business form is not a securities exemption. Limited partnership interests are securities like any other, and an offering of them must be registered in the state or fit an available exemption just the same.

Why: Federal covered securities are not subject to state registration, though notice filings and fees may still apply.

A federal covered investment adviser registers with:

1. A.The SECCorrect - federal covered advisers register federally.
2. B.The Federal ReserveThe Federal Reserve maintains no adviser registry and accepts no Form ADV. Its jurisdiction covers monetary policy and the banking system, which does not extend to investment advisory firms.
3. C.Each individual stateStates retain a role, which is what makes this the closest wrong answer, but it is a notice filing rather than registration. The state may collect a fee and a copy of the ADV; what it may not do is impose its own registration on a federal covered adviser.
4. D.FINRAFINRA registers broker-dealers and their representatives. No self-regulatory organization registers investment advisers, which is why federal covered advisers deal directly with the SEC.

Why: Federal covered advisers (generally 100M+ in AUM or advising registered funds) register with the SEC; states may require only a notice filing.