Robert Rapp
Limitations on the Scope of State Regulatory Authority over Intermediaries—Broker-Dealers and Investment Advisers—to Regulate Unlawful Conduct as Defined in "Dishonest or Unethical Business Practices" Administrative Rules Adopted under Blue Sky Laws. Generally, all state securities laws ("Blue Sky Laws") empower state securities commissioners to adopt rules addressing deceptive or dishonest business practices—fraud-based acts and conduct—by broker-dealers, investment advisers and their agents. Commonly, rules specify lists of such acts, and in a number of states the list matches with and expands specific statutorily identified fraudulent acts and practices. The key is to recognize general rulemaking authority that is necessary and appropriate to carry out the purpose(s) of the Blue Sky Law.
The National Securities Markets Improvement Act of 1996 federally preempted a great deal of state regulatory authority under Blue Sky Laws. However, it did not affect basic state licensing and regulatory authority over broker-dealers and investment advisers, and included an important overall savings provision regarding state antifraud enforcement authority. The scope of NSMIA preemption, and specifically the application of the savings provision for antifraud enforcement, has been litigated, although not definitively resolved. However, a recent Missouri federal court invalidated certain rules adopted under the Missouri Securities Act of 2003. In Securities and Financial Markets Association v. Ashcroft, the court held that (1) NSMIA preempted the rules and that (2) the savings provision for antifraud enforcement authority did not apply. The case has broad implications and it may head next to the Eighth Circuit.