National Securities Markets Improvement Act (NSMIA)

National Securities Markets Improvement Act (NSMIA)

The National Securities Markets Improvement Act (NSMIA) of 1996 reallocated regulatory authority in U.S. securities markets by strengthening federal oversight and limiting duplicative state regulation. It amended the Investment Company Act of 1940 and the Investment Advisers Act of 1940 and took effect on January 1, 1997.

Key takeaways

• NSMIA aimed to streamline securities regulation by reducing overlap between state and federal regulators.
• It granted the Securities and Exchange Commission (SEC) greater authority over nationally traded securities and certain investment company interests.
• Only “covered” securities—primarily nationally listed stocks and registered investment-company shares—are exempt from state-level securities (blue sky) regulation.

Background

State “blue sky” laws were enacted to protect investors from fraudulent and speculative offerings. After the 1929 stock market crash, these laws gained importance because federal oversight was limited. Over time, as the SEC and federal regulation developed, many state requirements began to duplicate federal rules and could slow capital formation.

What NSMIA does

• Preempts state regulation for designated “covered” securities, reducing the need for issuers and traders to navigate both state and federal registration and review processes.
• Defines “covered” securities to include, among other categories:
• Securities listed on national exchanges (e.g., NYSE, Nasdaq).
• Securities issued by investment companies that are registered or have filed registration statements under the Investment Company Act of 1940.

Scope and limitations

• The federal preemption created by NSMIA applies only to securities that meet the statute’s definition of “covered.”
• State regulators retain authority over securities that are not covered by NSMIA; those offerings remain subject to state registration and anti-fraud enforcement.

Impact

NSMIA reduced regulatory overlap, giving issuers and investors a clearer, more centralized framework for nationally traded securities. By shifting primary oversight to the SEC for covered securities, the law sought to increase market efficiency and speed capital formation while preserving state protections for non-covered offerings.

Conclusion

NSMIA represents a significant federal preemption in U.S. securities regulation, simplifying compliance for nationally traded securities and registered investment companies while leaving non-covered securities subject to state oversight.