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blue sky law
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What is a blue sky law?
A blue sky law is a U.S. state law that regulates the sales practices of securities, such as stocks and bonds. These laws require the registration of securities sold within a state and regulate broker-dealers and investment advisors. They also impose liability for false or misleading information related to securities.
These laws originated from concerns about fraudulent securities offerings. The term blue sky law came from the idea that issuers would sell building lots in the blue sky. The National Securities Markets Improvement Act of 1996 (NSMIA) exempts certain securities, called "covered securities," from state registration and review requirements.
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Why were blue sky laws created in the United States?
In the United States, blue sky laws are state regulations designed to oversee the sales practices of securities, such as stocks and bonds. The term arose from the concern that fraudulent securities offerings were becoming so widespread that promoters would literally try to sell investors building lots in the "blue sky".
These laws require the registration of securities sold within a state, regulate broker-dealers and investment advisors, and impose liability for false or misleading information. They also establish administrative agencies to enforce these regulations. By 1931, nearly all U.S. states had implemented laws regulating securities sales.
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How do blue sky laws help protect investors?
Blue sky laws are U.S. state regulations aimed at protecting investors from securities fraud. These laws require registration of securities sold within a state and regulate broker-dealers and investment advisors. They impose liability for false or misleading information related to securities.
These laws empower administrative agencies to conduct a merit review during registration, potentially prohibiting the sale of securities deemed unfair or inequitable. This contrasts with federal securities laws that prioritize full disclosure, allowing the market to determine fair pricing. The aim is to prevent the sale of essentially worthless ventures, or as one source puts it, selling investors "building lots in the blue sky".
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What types of financial products do blue sky laws regulate?
Blue sky laws are U.S. state laws that regulate the sales practices of securities, such as stocks and bonds, to protect investors from fraud. These laws require the registration of securities sold within a state, as well as the regulation of broker-dealers and investment advisers. Blue sky laws impose liability for false or misleading information related to securities and establish administrative agencies to enforce these regulations.
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How do blue sky laws differ from federal securities laws?
Blue sky laws are U.S. state laws that regulate the sales practices of securities, such as stocks and bonds. These laws require the registration of securities sold within a state, regulate broker-dealers and investment advisors, and impose liability for false or misleading information related to securities.
A key difference from federal securities law is that blue sky laws often include a merit review, empowering an administrative agency to prohibit the sale of securities deemed unfair or inequitable. Federal securities law, on the other hand, relies on the market to determine a fair price based on full disclosure of relevant information.
The Securities and Exchange Commission (SEC) oversees U.S. bond and equity markets and enforces securities laws related to public companies, fund and asset managers, investment professionals, and other market participants.
4 Britannica Sources- Financial regulators: The market police: Securities and Exchange Commission
- blue sky law
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- Dodd-Frank Wall Street Reform and Consumer Protection Act: Title IX: Investor Protections and Improvements to the Regulation of Securities
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What is an example of how a blue sky law works in practice?
Blue sky laws are U.S. state regulations on securities sales, meant to protect investors from fraud. The term arose from the idea that unscrupulous offerings would sell investors building lots in the "blue sky".
These laws require securities registration, regulate brokers and advisors, and allow administrative agencies to prohibit sales of securities deemed unfair. For example, in 2002, the New York Attorney General used the state’s blue sky law (the Martin Act) to settle with Merrill Lynch, leading to significant changes in the company's practices. This case became a leading example of regulation via prosecution, and other states later amended their blue sky laws to empower their attorneys general.
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blue sky law, any of various U.S. state laws designed to regulate sales practices associated with securities (e.g., stocks and bonds). The term blue sky law originated from concerns that fraudulent securities offerings were so brazen and commonplace that issuers would sell building lots in the blue sky.
Blue sky laws typically require the registration of any securities sold in a state, regulate broker-dealer and investment advisers, impose liability for false and misleading information relating to securities, and establish administrative agencies to enforce the laws. The registration requirements often include a merit review that gives the administrative agency the power to prohibit the sale of securities that it considers to be unfair or inequitable. This is in contrast to the federal securities-law approach, which relies on the market to determine a fair price after ensuring full disclosure of relevant information.
In general, blue sky laws predate the Securities Act of 1933 and the Securities Exchange Act of 1934 and were not preempted by those federal acts. By 1931 nearly all U.S. states had in place laws regulating the sales of securities. Blue sky laws in use in most U.S. states today are based on the Uniform Securities Act (USA) of 1956, which was designed by federal legislators to serve as a template states could use to craft their own laws. Although most states adopted some form of the USA, many made variations to it, which resulted in significant differences from state to state. Judicial interpretations of the USA can also vary significantly from state to state. Thus, actions that may be considered fraudulent under the USA in one state may not be considered fraudulent in a different state.
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In an attempt to achieve greater uniformity between states, and thus reduce the burden on issuers and broker-dealers, the U.S. Congress passed the National Securities Markets Improvement Act (NSMIA) of 1996. The NSMIA classifies certain securities as covered securities, which are exempt from state registration and merit-review requirements. The covered securities include those listed on a national stock exchange and mutual funds. In 1998 Congress passed the Securities Litigation Uniform Standards Act (SLUSA) in order to place limits on state court jurisdiction over securities fraud lawsuits. Under the act, federal courts have exclusive jurisdiction over class actions alleging fraud.
The SLUSA does not prohibit state and local governments (and their pension funds) from bringing securities fraud claims. The importance of this exception became clear in 2002, when the New York attorney general used the state’s blue sky law (known as the Martin Act) to reach a settlement with Merrill Lynch that required the company to make significant changes to its operating and disclosure practices. This settlement became a leading example of regulation by prosecution. Other states subsequently amended their blue sky laws to increase the prosecutorial powers of their attorneys general. Congress also considered new legislation in an ongoing attempt to find the appropriate balance between federal and state powers in securities regulation.