Federal covered security

A federal covered security is one whose registration is handled exclusively at the federal level, preempting state securities registration requirements. The category was created by the National Securities Markets Improvement Act of 1996 (NSMIA), which drew a line between federal and state authority: states cannot require registration of these securities, though they can still pursue fraud and may require a notice filing with a fee.

The most commonly tested examples are securities listed on a national exchange such as the NYSE or Nasdaq (and securities equal or senior to them, like a listed company's bonds or preferred stock), securities issued by investment companies registered under the Investment Company Act of 1940 (mutual funds, ETFs, closed-end funds), and securities sold to qualified purchasers or in certain exempt transactions, such as private placements under Regulation D Rule 506.

The concept matters because it defines the boundary of a state Administrator's power. A state can ask a mutual fund issuer for a notice filing and a filing fee before shares are sold in the state, but it cannot subject the fund to a merit review or its own registration process. State anti-fraud authority, however, always survives — no security is exempt from fraud rules.

Federal covered securities appear throughout the NASAA exams. The Series 63, Series 65, and Series 66 all test which securities qualify, the notice filing process, and the distinction between federal preemption of registration and the states' retained anti-fraud jurisdiction.