Does the federal National Securities Markets Improvement Act of 1996 preempt Idaho's requirement that insurance holding companies obtain a solicitation permit before marketing exempt private offerings of federally covered securities to Idaho investors?
Plain-English summary
Idaho legislators Stan Hawkins and David Callister asked whether Idaho Code § 41-2819, which requires insurance holding companies to get a solicitation permit from the Idaho Department of Insurance before soliciting Idaho investors for the sale of securities, applies to an exempt private offering of federally covered securities under Rule 506 of Regulation D (17 C.F.R. § 230.506) of the Securities Act of 1933.
Wasden concluded the Idaho permit requirement is preempted by the National Securities Markets Improvement Act of 1996 (NSMIA, Pub. L. No. 104-290, 110 Stat. 3416, codified at 15 U.S.C. § 77r).
The federal preemption. NSMIA Section 18(a) (15 U.S.C. § 77r(a)) broadly preempts state laws "requiring, or with respect to, registration or qualification of securities, or registration or qualification of securities transactions" as applied to "covered securities," and prohibits states from imposing conditions on the use of offering documents related to covered securities. Securities offered under Rule 506 of Regulation D are "covered securities" under NSMIA § 18(b)(4)(D).
The Idaho solicitation-permit requirement in § 41-2819 functions as a qualification requirement: the Idaho Department of Insurance must be satisfied that the proposed funds are not inadequate or excessive, that the securities or distribution method are not "inequitable," and that the offering is not "unfair" to existing or prospective security-holders. Those are merits-based qualification standards that NSMIA preempts.
Why McCarran-Ferguson doesn't save it. The McCarran-Ferguson Act (15 U.S.C. § 1011 et seq.) preserves state regulation of "the business of insurance" against federal preemption. But Idaho Code § 41-2819 regulates securities offerings by insurance holding companies, not the business of insurance itself. Insurance regulation typically focuses on policyholder protection, rate setting, claims handling, and reserve requirements; securities-offering regulation focuses on investor protection. The two are different regulatory subjects. NSMIA preempts the latter without disturbing the former.
The opinion concludes that an Idaho court would likely find § 41-2819 preempted as applied to Rule 506 offerings of federally covered securities by insurance holding companies.
Currency note
This opinion was issued in 2002. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.
NSMIA's preemption framework has been the subject of significant federal guidance and litigation since 2002, including SEC rulemaking on Regulation D and Rule 506(c) (general solicitation, added by the JOBS Act of 2012). State responses have evolved, and Idaho Code § 41-2819 may itself have been amended. Anyone advising an insurance holding company on a current Rule 506 offering should consult current SEC rules, current Idaho Code and Department of Insurance practice, and the current state of NSMIA preemption case law.
Common questions
Q: What is NSMIA?
A: The National Securities Markets Improvement Act of 1996 (Pub. L. No. 104-290). It rationalized federal-state securities regulation by preempting most state "blue sky" registration and qualification requirements as applied to certain "covered securities" (including securities listed on major national exchanges and securities offered under specified federal exemptions like Rule 506 of Regulation D). Filing notice and fee requirements remain at the state level; merits review and qualification do not.
Q: What is Rule 506 of Regulation D?
A: An SEC safe harbor for private placements of unlimited amounts of securities to "accredited investors" plus up to 35 sophisticated non-accredited investors. The 1933 Act exemption is for offerings "not involving any public offering"; Rule 506 provides a defined-rule path to that exemption.
Q: Why is the AG's preemption analysis important for insurance companies?
A: Because insurance holding companies (the parent entities that own insurance subsidiaries) frequently raise capital through securities offerings to fund growth, acquisitions, or surplus. An additional state-level merits review by the Insurance Commissioner adds time, cost, and uncertainty. Confirming that NSMIA preempts the Idaho-specific requirement lets these issuers rely on the federal Rule 506 framework without the duplicative state process.
Q: What is McCarran-Ferguson?
A: A 1945 federal statute (15 U.S.C. § 1011 et seq.) that reserves to the states the regulation of "the business of insurance," with limited exceptions. It functions as a "reverse preemption" statute, blocking federal laws that would otherwise displace state insurance regulation, unless the federal law specifically targets the insurance business. The AG concluded that NSMIA does not target the business of insurance and that § 41-2819's securities-offering qualification regime is not itself "the business of insurance."
Q: Are state notice filings still permitted under NSMIA?
A: Yes. NSMIA Section 18(c) allows states to require notice filings and fees, but not registration or qualification, for federally covered securities. Idaho can require an offering issuer to file a Form D notice and pay a fee, but it cannot require the merits-review-style permit that § 41-2819 would otherwise require.
Background and statutory framework
Before NSMIA, securities offerings were dual-regulated: the SEC at the federal level under the 1933 Act, and each state at the state level under "blue sky" laws. State requirements could include registration, merits review, and disclosure obligations, with significant variation across states. NSMIA Section 18 preempted state qualification requirements for "covered securities," including securities offered under Rule 506 of Regulation D, as part of a 1996 Congressional effort to reduce duplicative regulation.
Idaho Code § 41-2819 is part of Title 41, Idaho's insurance code. It applies to insurers and insurance holding companies and requires them to obtain a "solicitation permit" before soliciting Idaho investors in their securities. The permit standards in subsection (2) are merits-review standards: adequacy of funds, equity of the securities and distribution, fairness to security-holders.
Citations and references
Statutes and regulations: see the list at the top of the file.
Cases:
- Cipollone v. Liggett Group, 505 U.S. 504 (1992) (preemption framework)
- California Federal Savings & Loan Ass'n v. Guerra, 479 U.S. 272 (1987)
- Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987) (McCarran-Ferguson)
Federal materials:
- NSMIA, Pub. L. No. 104-290, 110 Stat. 3416 (1996)
- McCarran-Ferguson Act, 15 U.S.C. § 1011 et seq.
- Securities Act of 1933, 15 U.S.C. § 77a et seq.
Source
- Landing page: https://www.ag.idaho.gov/office-resources/opinions/
- Original PDF: https://ag.idaho.gov/content/uploads/2018/04/Op02-02.pdf
Original opinion text
ATTORNEY GENERAL OPINION 02-2
To: The Honorable Stan Hawkins
P.O. Box 367
Ucon, ID 83454
The Honorable David Callister
7011 Holiday Drive
Boise, ID 83709
Per Request for Attorney General's Opinion
QUESTION PRESENTED
You inquire whether the National Securities Markets Improvement Act of 1996 ("NSMIA") (Public Law No. 104-290, 110 Stat. 3416, codified in part at 15 U.S.C. § 77r) preempts Idaho Code § 41-2819 under the circumstances relevant to your inquiry and set forth below. Idaho Code § 41-2819 requires an insurance holding company to obtain a solicitation permit from the director of the Department of Insurance prior to soliciting in Idaho for the sale of its securities, even for an exempt private offering of its federally covered securities pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933.
CONCLUSION
Insofar as Idaho Code § 41-2819 requires that an insurance holding company obtain a solicitation permit from the director prior to soliciting Idaho investors for an exempt private offering of its federally covered securities pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933, it appears to be preempted by NSMIA.
[The full opinion runs approximately 12 pages, with sections on the analysis of Idaho Code § 41-2819, the structure of NSMIA Section 18 (15 U.S.C. § 77r) and its preemption mechanism, the definition of "covered securities," the discussion of the McCarran-Ferguson savings analysis, and the application to Rule 506 offerings. See the linked PDF for the complete text.]
DATED this 28th day of June, 2002.
LAWRENCE G. WASDEN
Attorney General