The authors are attorneys in the Chicago-based law firm of Smith Lodge & Schneider, Chartered, representing banks, broker-dealers, financial institutions and public companies in securities, banking and commercial law matters. Mr. Schneider was formerly a senior staff member of the Securities and Exchange Commission, Division of Market Regulation. Smith Lodge & Schneider served as counsel to bank transfer agents and to the Securities Transfer Association in connection with the creation of open-availability plans and SEC clearance for the use of such plans by issuers and banks.

State securities laws, commonly referred to as "blue sky" laws, contain provisions concerning securities registration, broker-dealer registration and salesperson registration. These provisions have posed administrative complications for both public companies and bank transfer agents in the implementation and operation of "direct" or "open-availability" stock purchase plans.

The National Securities Markets Improvement Act, enacted into law in October or 1996, simplifies securities regulation by giving the states and the SEC clearly separate regulatory responsibilities regarding security offerings, mutual funds, investment advisers and broker dealers. This is very good for public companies interested in direct stock plans. Of particular significance to issuers and agents, the Act eliminates redundant state and federal requirements for registering securities and creates a comprehensive system of securities regulation – subject to the oversight of the SEC – for offerings that are "national" in character. Key changes in the interrelationship of state and federal law are summarized below.

Title I of the Act, captioned the Capital Markets Efficiency Act of 1996, eliminates securities registration requirements that previously existed in a few states. The Market Act does this by exempting from state registration requirements securities that are registered at the federal level and either listed on the NYSE or the AMEX, or qualified for trading in NASDAQ-National Market System, as well as categories of securities listed on other exchanges or trading systems having substantially similar listing standards as determined by SEC rule. The Markets Act also specifically exempts from state registration requirements securities offered by mutual funds registered under the Investment Company Act of 1940.

The effect of the Markets Act on issuers developing open-availability plans registered under the Securities Act of 1933, generally on Form S-3 ("Registered Plans"), is significant. Prior to the Markets Act, issuers creating Registered Plans for securities traded on the national exchanges faced notice and filing requirements and fee payments in a number of states. Such state requirements made the creation of Registered Plans for issuers expensive and injected additional administrative and compliance complications into the plan development process. The Markets Act removes these regulatory complications for NYSE, AMEX, and NASDAQ-NMS issuers, substantially simplifying such issuers’ ability to make Registered Plan services available to residents anywhere in the United States. (The Markets Act does not affect open-availability plans sponsored and administered by bank transfer agents ("Bank-Sponsored Plans"), because such plans generally have not faced securities registration requirements if the securities are NYSE or AMEX listed, or qualified for NASDAQ-NMS trading.)

The Markets Act thus significantly removes state securities registration requirements for issuers whose plan securities are traded in the primary national markets. The Act contains two important limitations, however that will continue to impact open-availability plans. First, the Markets Act creates exemptions from registration only for the designated securities. All other securities must observe state requirements for registration, including notice filings and fee payments, unless or until the SEC issues regulations declaring that the regional market in which the securities are traded is substantially similar to the named national markets. Second, the Markets Act does not preempt state broker, dealer, or sales agent registration requirements, which exist in a limited number of states. These registration requirements are applicable to both Registered Plans and Bank-Sponsored Plans, though the requirements vary from state to state depending on the type of entity involved in "broker" functions in connection with plan operations. Consequently, issuers and banks will need to continue to monitor the status of their respective plans under the Markets Act and maintain appropriate compliance approaches.