MVA White Collar Defense, Investigations, and Regulatory Advice Blog

On April 8, 2025, then Acting Chairman Mark T. Uyeda of the U.S. Securities and Exchange Commission (“SEC”), highlighted in remarks before the Annual Conference on Federal and State Securities Cooperation two areas where regulators may wish to reconsider the scope of federal preemption under the National Securities Markets Improvement Act of 1996 (“NSMIA”). Specifically, he highlighted the need to revisit the split between federal and state regulation of “mid-sized” and “large” investment advisers and the types of securities transactions that benefit from federal preemption of state registration or qualification requirements. While it is not clear that these comments will also reflect a priority for incoming SEC Chairman Paul Atkins, they raise several interesting questions and scenarios for a potential rebalancing between the SEC and state regulators, especially in light of Securities Indus. and Fin. Markets Assn. v. Ashcroft, 745 F. Supp. 3d 783 (W.D. Mo. 2024) which reiterated the limited role states play in the regulation and supervision of large investment adviser firms.

SEC Regulation of Investment Advisers

Based on amendments to the Investment Advisers Act of 1940 (the “IAA”) by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), investment advisers are generally (i) required to register with the SEC once their assets under management[1] (“AUM”) exceed $110 million and (ii) prohibited from registering with the SEC (and must register with the state that it maintains its principal office and place of business, and may need to register in additional states where its clients are located) as long as AUM are below $25 million. Due to the various exceptions, exemptions and other carveouts in the IAA and state securities law, the analysis for whether a specific investment adviser must register (and with whom) can be complex. Critically, an investment adviser that is registered with the SEC benefits from broad preemption of state laws purporting to regulate investment advisers except in cases of fraudulent or deceptive conduct. We’ve provided a general summary of the current structure below.

Acting Chairman Uyeda stated that given the continued growth in advisers’ AUM since Dodd-Frank and the increased number of entities that now qualify as large advisers, it may be time to reexamine the mid-size/large adviser regulatory split.  He suggested considering whether the split should be adjusted upwards to allow the SEC to focus on the larger, more complex advisers while increasing the number of advisers subject to state regulation. Notably, he did not suggest reviewing either the exemptions that advisers often rely on to fast-track SEC registration or the SEC’s broad statements regarding preemption of state investment adviser law as applied to SEC-registered advisers.

Federal Preemption of Securities Transactions

NSMIA generally prohibits states from (i) requiring the registration or qualification of, or (ii) restricting the use of certain offering documents, proxy statements or reports to shareholders related to, securities transactions that fall within the definition of a “covered security” under 12 U.S.C. §77r(b). The list of covered securities includes, among others, listed securities, securities sold only to qualified purchasers, and securities that qualify for safe harbor exemptions from federal registration, such as Rule 506(c) offerings under Regulation D.

However, as Acting Chairman Uyeda notes, what is and is not a covered security can be unnecessarily complex and may lead in some cases to anomalous results. For example, if a company registers a securities offering on a Form S-1 with the SEC and lists the shares on a national securities exchange, the securities are covered securities and secondary trading in those securities is also considered a covered security transaction and so not subject to state registration requirements. However, if the company goes through SEC registration but doesn’t list the shares on a securities exchange, neither the initial offering or secondary offerings are considered covered securities and so are subject to state registration requirements. It is odd that despite going through the same rigorous registration process with the SEC in both instances, the outcome between these two scenarios for the primary offering is so different.

Acting Chairman Uyeda also highlighted how many of the safe harbor exemptions from federal registration, such as Rule 506, Regulation A – Tier 2 and Regulation Crowdfunding, would qualify as covered securities, but any secondary trading would be subject to state registration or qualification requirements, significantly limiting the ability of purchasers to resell such securities and requiring investors to undergo a complicated securities analysis for each subsequent transaction.

Of course, many will point out that an individualized analysis of each specific securities transaction is a cornerstone of U.S. securities law given the differences that could occur (e.g., there is a significant difference between a small company raising funds from an accredited investor and that accredited investor now turning around and selling shares to the general investing public). However, Acting Chairman Uyeda raises a fair point – especially in the context of securities transactions that don’t result in the sold securities being restricted securities.

To rationalize the regulatory regime in a way that may reduce regulatory complexity and facilitate more cost-efficient means of capital formation while preserving a role for states in investor protection, Acting Chairman Uyeda proposed a possible middle ground - where a company would only be required to comply, at the state level, with the registration or qualification requirements of the state where the company is headquartered, rather than the laws of all states where the offer or sale occurs.

Takeaways

Investment Adviser Preemption. The timing of Acting Chairman Uyeda’s comments is interesting as federal preemption under NSMIA has become a hot topic in the past year. In contrast to on-going disputes around the proper scope of the National Bank Act’s preemption of state laws to national banks, the respective responsibilities of state regulators and the SEC for the regulation of securities markets and securities intermediaries such as broker-dealers and investment advisers has been far less contentious, likely due to clearer standards articulated by Congress in that space. As a result, instances of courts having to resolve preemption disputes under NSMIA have been scarce.

However, in 2024 the securities industry, led by the Securities Industry and Financial Markets Association (“SIFMA”), received a favorable decision in the closely watched Securities Indus. and Fin. Markets Assn. v. Ashcroft, 745 F. Supp. 3d 783 (W.D. Mo. 2024). There, SIFMA successfully challenged a Missouri law that required broker-dealers and investment advisers to make certain disclosures and keep records when they advise clients on investment strategies that incorporate a social or nonfinancial objective. The court held the law’s disclosure and recordkeeping requirements were preempted as applied to broker-dealers and SEC-registered investment advisers. For investment advisers, the court approvingly cited the SEC’s statements on the broad preemptive effect of NSMIA and Congress’ statements that larger advisers should be subject to national rules, with states relegated to regulating “small investment advisers whose activities are likely to be concentrated in their home state.”

Notably, the District Court also disagreed with the state’s argument that its rules were really imposed not on the federally-registered investment adviser, but on the representatives of such advisers who are registered with the state consistent with NSMIA’s separation of responsibilities between state and federal authorities. The court looked through the technical application of the law to the representatives and held that it still served to impermissibly regulate investment advisers because the law, in practice, created compliance obligations for the firm – which went further than NSMIA’s authorization for states to “license, register, or otherwise qualify any investment advisers representative.”

Accordingly, Acting Chairman Uyeda’s comments may be of particular interest to some states given Securities Indus. and Fin. Markets Assn. v. Ashcroft’s articulation of the scope of state law preemption under NSMIA for federally-registered investment advisers. Under Chairman Uyeda’s potential resizing of the regulatory split for mid-size/large advisers, the states would be responsible for regulating a larger pool of investment advisers, which would also result in the receipt of increased supervisory assessment fees for some states that may offset the loss of fees associated with the proposal to reconsider the scope of federal preemption of state law securities registration or qualification requirements.

AUM Threshold. Although Acting Chairman Uyeda’s comments were focused on increasing the AUM threshold for SEC registration, AUM arguably isn’t the best test for differentiating between state and SEC registration given Congress’ intent that the SEC regulate national firms (and permit national businesses to operate without being subject to differing state-by-state regimes). Further, given the exemptions from the prohibition on SEC registration for multi-state advisers and internet-based advisers, it isn’t clear that increasing the $100 million/$110 million AUM threshold would really lead to a shift in advisers transitioning to state regulation. The only advisers that would presumably be forced to transition would be regional advisers that operate in less than 15 states with high AUM. Finally, rather than solely focusing on AUM as a threshold for regulatory complexity, a more appropriate measure may be a combination of AUM and the scope of advisory services offered. For example, an adviser that offers advisory services covering both securities and alternative investment strategies may be better regulated by the SEC given their experience regulating large advisory firms that have historically offered these types of strategies.

Securities Transaction Preemption. In general, Acting Chairman Uyeda’s statements regarding NSMIA preemption for covered securities suggest consideration of a less expansive role for state regulators in connection with securities offerings and secondary offerings moving forward. States would presumably still retain the authority to police fraudulent conduct, and so this may be a fair trade off for some state regulators, especially if they were to assume supervisory and authority over a larger number of investment advisory firms.

[1] “Assets under management” is defined to mean the securities portfolios with respect to which an investment adviser provides continuous and regular supervisory or management services. Special rules apply to calculating this value for certain client accounts, such as those for private funds, or accounts where an adviser may only be tasked with advising a portion of a portfolio.