Definition of the National Securities Market Improvement Act (NSMIA)


What is the National Securities Market Improvement Act (NSMIA)?

The National Securities Market Improvement Act is a law passed in 1996 that sought to simplify the regulation of securities in the US by assigning more regulatory power to the federal government.

Key takeaways

  • The National Securities Markets Improvement Law sought to increase efficiency in the securities market by creating a less onerous and more effective regulation.
  • The NSMIA promoted efficiency by reducing the amount of interaction between competing regulatory agencies, that is, between states and the SEC.
  • The NSMIA provisions only exempt “covered” securities (nationally traded stocks and mutual funds) from state-level regulation.

Understanding the National Securities Markets Improvement Act (NSMIA)

The National Securities Market Improvement Act (NSMIA) amended the Investment Companies Act of 1940 and the Investment Advisers Act of 1940 and entered into force on January 1, 1997. Its main consequence was to increase the authority of federal regulators at the expense of their state-level counterparts, a change that was expected to increase the efficiency of the financial services industry.

Before NSMIA, Blue Sky laws at the state level, which were passed to protect retail investors from scams, were considerably more powerful. However, because the securities subject to this regulation were already subject to strong federal regulation, these laws are likely to slow things down in the market. The NSMIA reduced the amount of interaction between competing regulatory agencies by transferring most of the regulatory power from the state to the federal government, namely the Securities and Exchange Commission (SEC).

The law states that “covered” securities are exempt from having to go through state regulatory agencies. Today, most stocks that are traded in the US are considered hedged securities. In addition to offers and sales of certain exempt securities, NSMIA defines “covered” securities as securities that:

  • are listed on national stock exchanges such as the New York Stock Exchange and the Nasdaq
  • are issued by an “investment company that is registered, or has filed a registration statement, under the Investment Companies Act of 1940”

History of the National Law for the Improvement of Securities Markets

Before the enactment of the NSMIA in 1996, the states’ blue sky laws had significant regulatory power over capital formation in the stock market. The term “blue sky law” is said to have originated in the early 1900s, gaining widespread use when a Kansas Supreme Court justice declared his desire to protect investors from speculative companies that “had no more base that so many feet of blue sky “. ‘”

This law proved to be particularly necessary after the stock market crash in 1929. There was a lot of uncertainty during this time and investors were not fully confident that the stocks they were investing in were legitimate. In fact, many companies issued stocks, promoted real estate and other investment deals while making lofty and unsubstantiated claims of higher profits down the road. At this time, the SEC did not yet exist and there was little regulatory oversight of the financial and investment industry as a whole.

However, since the creation of the SEC and advances in technology and accounting systems, blue sky laws simply duplicate regulatory measures imposed by the SEC that can slow down capital formation, particularly among smaller companies.

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Mark Holland

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