Federal Covered Securities

B is correct. Securities offered under Regulation D Rule 506(b) are federal covered securities under NSMIA, which means they are exempt from state registration requirements. However, states retain authority to require notice filing (Form D) and collect filing fees. The issuer must comply with these notice filing requirements in each state where securities are offered or sold, but states cannot impose full registration or merit review.

A is incorrect because Rule 506(b) offerings ARE federal covered securities exempt from state registration under NSMIA. C is incorrect because while Rule 506(b) offerings are exempt from state registration, states can still require notice filing and fees. NSMIA did not eliminate all state authority, only registration and merit review authority. D is incorrect because states are explicitly prohibited from conducting merit review of federal covered securities. Merit review authority was preempted by NSMIA for federal covered securities.

D is correct. The National Securities Markets Improvement Act (NSMIA) of 1996 created the federal covered securities designation and preempted state authority to require registration of these securities. NSMIA established that securities listed on national exchanges, investment company securities, and Rule 506 offerings would be regulated at the federal level, with states limited to notice filing, fee collection, and anti-fraud enforcement.

A is incorrect because the Securities Act of 1933 established federal securities registration requirements but did not preempt state authority. Prior to NSMIA, issuers faced dual federal-state registration (blue sky laws). B is incorrect because the Securities Exchange Act of 1934 primarily regulates secondary market trading, broker-dealers, and exchanges, not the federal-state division of registration authority. C is incorrect because the Investment Company Act of 1940 regulates mutual funds and other investment companies but did not create the federal covered securities concept.

B is correct. Securities listed on national exchanges such as NASDAQ (along with NYSE and other equivalent exchanges) automatically qualify as federal covered securities under NSMIA. Microsoft stock listed on NASDAQ is exempt from state registration requirements, though states can require notice filing and collect fees.

A is incorrect because Rule 504 offerings are NOT federal covered securities. Only Rule 506(b) and Rule 506(c) offerings under Regulation D qualify as federal covered securities. Rule 504 offerings may still require state registration or a state exemption. C is incorrect because Rule 701 (employee compensation plans) provides a different exemption but does not create federal covered security status under NSMIA. D is incorrect because municipal securities have their own exemption from registration (both federal and state) under the Securities Act of 1933, but they are not classified as "federal covered securities" under NSMIA. This is a technical distinction the exam may test.

C is correct (the EXCEPT answer). Securities offered under Regulation D Rule 504 are NOT federal covered securities. Rule 504 offerings (limited to $10 million in 12 months) do not receive federal covered security status and may require state registration or reliance on state exemptions. This is a key distinction from Rule 506 offerings.

A is a category of federal covered securities: Securities listed on national exchanges such as NYSE, NASDAQ, and equivalent exchanges automatically qualify as federal covered securities under NSMIA Section 18(b)(1). B is a category of federal covered securities: All securities issued by investment companies registered under the Investment Company Act of 1940 (mutual funds, ETFs, closed-end funds, UITs) are federal covered securities under NSMIA. D is a category of federal covered securities: Securities offered under Regulation D Rule 506(c) (along with Rule 506(b)) are federal covered securities, exempt from state registration requirements though subject to state notice filing.

B is correct. Statements 1, 2, and 4 are accurate.

Statement 1 is TRUE: Securities issued by registered investment companies (mutual funds, ETFs, etc. registered under the Investment Company Act of 1940) are automatically federal covered securities under NSMIA. Velocity Mutual Fund shares qualify as federal covered securities.

Statement 2 is TRUE: While the fund shares themselves are federal covered securities exempt from state registration, the broker-dealer selling the shares is NOT exempt from state registration. California can require the broker-dealer to register as a broker-dealer in the state. Federal covered security status applies to the security, not the seller.

Statement 3 is FALSE: States are explicitly prohibited from imposing merit review requirements on federal covered securities. California cannot review the fund's investment strategy, fee structure, or other substantive elements to determine if it "merits" being sold in the state. NSMIA preempted state merit review authority for federal covered securities.

Statement 4 is TRUE: NSMIA did not eliminate state anti-fraud authority. California retains full authority to investigate and prosecute fraud in the offer or sale of federal covered securities. States can enforce their anti-fraud provisions and pursue fraudulent activities even though they cannot require registration or merit review.