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 an insurance holding company to get a solicitation permit from the director of the Department of Insurance before soliciting Idaho investors for the sale of its securities, applies even to an exempt private offering of federally covered securities under Rule 506 of Regulation D, promulgated under the Securities Act of 1933.

Attorney General Alan Lance concluded that, to that extent, § 41-2819 "appears to be preempted by" the National Securities Markets Improvement Act of 1996 (NSMIA, Pub. L. No. 104-290, 110 Stat. 3416, codified in part at 15 U.S.C. § 77r).

How NSMIA preempts. Section 18(a) of NSMIA (15 U.S.C. § 77r(a)) bars state laws that require registration or qualification of "covered securities," and bars state laws that limit or condition an offering based on its merits. Securities offered under Rule 506 of Regulation D are "covered securities" under 15 U.S.C. § 77r(b)(4)(D). The opinion read Idaho's solicitation-permit prerequisite in § 41-2819(1) as a law "requiring or with respect to" registration or qualification under section 18(a)(1), and at minimum as a merits-based limit on the offering under section 18(a)(3). The denial grounds in § 41-2819(2) (that the funds sought are inadequate or excessive, that the securities or their distribution are inequitable, or that the offering would be unfair to existing or prospective security-holders) are the kind of merits review NSMIA displaces.

Why McCarran-Ferguson does not save the statute. The McCarran-Ferguson Act (15 U.S.C. § 1012) keeps federal law from overriding state laws "enacted for the purpose of regulating the business of insurance" unless the federal law "specifically relates to the business of insurance." The opinion worked through that test. NSMIA does not specifically relate to the business of insurance (the opinion contrasted Barnett Bank of Marion County v. Nelson, where a federal statute did expressly refer to insurance). And § 41-2819 was not, in the opinion's reading, enacted to regulate the business of insurance: applying the three "business of insurance" criteria from Union Labor Life Insurance Co. v. Pireno, the AG found the statute fails the first two, because its denial grounds protect existing and prospective shareholders and investors rather than policyholders. The opinion also pointed to § 41-2819(5), which states the section is "supplemental to other laws of this State applicable to the sale of securities," as confirmation that the provision is securities regulation rather than insurance regulation.

The opinion concluded that a court of competent jurisdiction would likely find § 41-2819 preempted by NSMIA as applied to a Rule 506 offering of federally covered securities by an insurance holding company, and noted that Ninth Circuit case law (Patenaude v. Equitable Life Assurance Society) pointed the same way.

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 the McCarran-Ferguson Act, and why didn't it protect the Idaho permit?
A: McCarran-Ferguson (15 U.S.C. § 1012) keeps federal law from overriding state laws enacted to regulate "the business of insurance," unless the federal law specifically relates to insurance. The opinion concluded the act did not rescue § 41-2819 for two reasons: NSMIA does not specifically relate to the business of insurance, and § 41-2819 was not enacted to regulate the business of insurance. Applying the Pireno criteria, the AG found the statute's permit-denial grounds protect investors and shareholders, not policyholders, and § 41-2819(5) calls the section supplemental to the state's securities laws. So the statute reads as securities regulation, which NSMIA preempts.

Q: Are state notice filings still permitted under NSMIA?
A: In general, yes. NSMIA allows states to require notice filings and fees for federally covered securities; what it preempts is state registration, qualification, and merits review of those securities. The opinion's conclusion was that Idaho's solicitation-permit requirement, with its merits-based denial grounds, crossed into the preempted territory.

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 sits in Title 41, Idaho's insurance code. As described in the opinion's Question Presented, it requires an insurance holding company to obtain a solicitation permit from the director of the Department of Insurance before soliciting in Idaho for the sale of its securities, including for an exempt Rule 506 private offering.

Citations and references

Statutes: Idaho Code § 41-2819 (and subsections (1), (2), (5)); 15 U.S.C. § 77r, § 77r(a), § 77r(b)(4)(D); 15 U.S.C. § 1012 (McCarran-Ferguson Act); Securities Act of 1933.

Cases (per the opinion's "Authorities Considered"):

• United States Department of Treasury v. Fabe, 508 U.S. 491 (1993)
• Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996)
• Securities and Exchange Commission v. National Securities, Inc., 393 U.S. 453 (1969)
• Union Labor Life Insurance Co. v. Pireno, 458 U.S. 119 (1982)
• Rush Prudential HMO, Inc. v. Moran, 122 S. Ct. 2151 (2002)
• Patenaude v. Equitable Life Assurance Society of the United States, 290 F.3d 1020 (9th Cir. 2002)

Federal materials:

• NSMIA, Pub. L. No. 104-290, 110 Stat. 3416 (1996)
• Rule 506 of Regulation D, under the Securities Act of 1933

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.

ANALYSIS

Idaho Code § 41-2819 explicitly applies to insurers and insurance holding corporations, as well as others similarly situated. The statute prohibits such an entity from soliciting or receiving funds in Idaho in exchange for its securities until the company has been granted a solicitation permit. Idaho Code § 41-2819(1). Subsection (2) of Idaho Code § 41-2819 provides:

The director shall issue such a permit unless he finds:
(a) That the funds proposed to be secured are inadequate or excessive in amount for the purposes intended, or
(b) That the proposed securities or the manner of their distribution are inequitable, or
(c) That the offering or issuance of the securities would be unfair to existing or prospective holders of securities of the same insurer, corporation, syndicate, organization, or entity.

The NSMIA provides exemptions from the applicability of certain state laws. Section 18(a) of the Act (15 U.S.C. § 77r(a)) provides in part:

Except as otherwise provided in this section, no law . . . of any State . . .
(1) requiring, or with respect to, registration or qualification of securities, or registration or qualification of securities transactions, shall directly or indirectly apply to a security that—
(A) is a covered security; or
(B) will be a covered security upon completion of the transaction;
. . .
(3) shall directly or indirectly prohibit, limit, or impose conditions based on the merits of such offering or issue, upon the offer or sale of any security described in paragraph (1).

Securities offered pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933 qualify as covered securities under 15 U.S.C. § 77r(b)(4)(D).

Read in its most broad sense, the prerequisite of a solicitation permit in Idaho Code § 41-2819(1) might be construed as a law "requiring or with respect to" the registration or qualification of securities as set forth in section 18(a)(1) of the NSMIA. Even if such a broad reading stretches the language too far, the solicitation permit requirement for subsequent financing contained in Idaho Code § 41-2819(1) falls within the scope of NSMIA section 18(a)(3) by placing limits on the offering of securities.

The McCarran-Ferguson Act enacted by Congress in 1945 reserves to the states the regulation and taxation of insurance and provides, in essence, an anti-preemption provision. 15 U.S.C. § 1012. The McCarran-Ferguson Act provides, in part:

No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, . . . unless such Act specifically relates to the business of insurance . . . .

The Supreme Court has stated that the above quoted "first clause" of 15 U.S.C. § 1012(b) "was intended to further Congress' primary objective of granting the States broad regulatory authority over the business of insurance." United States Department of Treasury v. Fabe, 508 U.S. 491, 505, 113 S. Ct. 2202, 2210, 124 L. Ed. 2d 449 (1993). As set forth in Fabe, the McCarran-Ferguson Act overturned the normal rules of preemption, which provide simply that inconsistent state laws are preempted by federal laws.

It seems clear that section 18(a)(1) or (3) of the NSMIA would be construed to invalidate, impair, or supersede Idaho Code § 41-2819. Thus, under the McCarran-Ferguson Act, preemption may occur: (1) if NSMIA specifically relates to the business of insurance, or (2) even if it does not, if Idaho Code § 41-2819 was not enacted "for the purpose of regulating the business of insurance."

While there are references in the NSMIA and other securities acts indicating that the NSMIA applies to variable annuities, hybrid products containing attributes of securities and insurance products, the NSMIA itself does not seem "specifically related to the business of insurance" as opposed to securities regulation. See Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 116 S. Ct. 1103, 134 L. Ed. 2d 237 (1996) (federal statute that permitted certain national banks to sell insurance in small towns specifically referred to insurance). Recognizing direct conflict between the NSMIA exemption provisions concerning applicability of state law to covered securities and Idaho Code § 41-2819 and despite that the NSMIA does not appear to be specifically related to the business of insurance on its face, Idaho Code § 41-2819 may still be preempted under the McCarran-Ferguson analysis if it is not a law enacted "for the purpose of regulating the business of insurance".

In Securities and Exchange Commission v. National Securities, Inc., 393 U.S. 453, 462, 89 S. Ct. 564, 569, 21 L. Ed. 2d 668 (1969), the United States Supreme Court ruled that the Arizona law that required the Arizona Director of Insurance "to find that the proposed merger would not 'substantially reduce the security of and service to be rendered to policyholders'" before he approved the proposed merger clearly related to the business of insurance. The Court in National Securities, Inc., held that the McCarran-Ferguson Act did not bar a federal remedy that affected a matter that was subject to state insurance regulation. In this case, the Securities and Exchange Commission (SEC) sought remedies based on allegedly fraudulent conduct on behalf of the proponents of the merger. The Supreme Court determined there was no conflict between the statutes and that allowing the SEC to pursue remedies under federal law did not effectively "invalidate, impair, or supersede" the Arizona statute. However, there is some discussion in National Securities, Inc., indicating laws that regulate the relationship between a stockholder and the company in which stock is owned are not insurance regulation but rather securities regulation. Id., 393 U.S. at 460, 89 S. Ct. at 569.

The Supreme Court has identified three criteria relevant to whether activity constitutes the business of insurance for purposes of McCarran-Ferguson Act preemption. They are: "first, whether the practice has the effect of transferring or spreading a policyholder's risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry." Union Labor Life Insurance Co. v. Pireno, 458 U.S. 119, 129, 102 S. Ct. 3002, 3008, 73 L. Ed. 2d 647 (1982). Most recently, the United States Supreme Court indicated that the three McCarran-Ferguson criteria are "guideposts," all of which need not be met to withstand preemption. See Rush Prudential HMO, Inc. v. Moran, 122 S. Ct. 2151 (June 20, 2002).

The majority in Fabe indicated its belief that not only does the writing of an insurance contract fall within the scope of the business of insurance, but so does the actual performance of an insurance contract. The Court in Fabe found that the portion of the Ohio liquidation priority statute affecting policyholder interests and the administrative expenses in the liquidation of an insurer was enacted for the purpose of regulating the business of insurance. But to the extent the statute is designed to advance the interests of other creditors, the statute was not enacted for the purpose of regulating the business of insurance. Fabe, 508 U.S. 508, 113 S. Ct. 2212.

Facially, Idaho Code § 41-2819 does not satisfy the first two McCarran-Ferguson criteria. The third criterion may be satisfied because the statute is limited to insurers or insurance holding companies. But, potential or actual investors may or may not be policyholders. The three bases of denial pursuant to Idaho Code § 41-2819(2) appear to be directed more toward the protection of existing or prospective shareholders, not policyholders, of the company. Moreover, Idaho Code § 41-2819(5) provides, "This section is supplemental to other laws of this State applicable to the sale of securities". This provision tends to undermine arguments that Idaho Code § 41-2819 should not be applied because other Idaho securities laws might apply to protect potential Idaho investors by their own terms, because Idaho Code § 41-2819 is expressly supplemental, or in addition, to other Idaho securities laws. Subsection (5) provides additional insight, however, into the Idaho Legislature's purpose in enacting Idaho Code § 41-2819. The law creates, in essence, additional securities protection for existing and potential investors where the securities to be sold are those of an insurance company or insurance holding company. While the legislature's desire to provide a second layer of oversight to protect existing or potential investors appears in the insurance code and is thus unique to Idaho's regulation of the business of insurance, Idaho Code § 41-2819 does not truly relate to a practice that "is limited to entities within the insurance industry."

Recent case law also indicates that the Ninth Circuit Court of Appeals would likely view the NSMIA as preempting Idaho Code § 41-2819 under the circumstances presented. See, e.g. Patenaude v. Equitable Life Assurance Society of the United States, 290 F.3d 1020, 1028, n.8 (even if the California Insurance Code, as opposed to the California Business and Professional Code, had an express statute that was in conflict with a companion federal securities act of NSMIA, the state law would likely be preempted).

One could argue that there is a general insurance business purpose supporting Idaho Code § 41-2819, such as advancing general oversight of financial solvency of insurance holding companies, and therefore ultimately insurers, which is thus related to the performance of insurance contracts. Realistically, a federal court would conclude that Idaho Code § 41-2819, requiring an insurance holding corporation to obtain a solicitation permit prior to soliciting or receiving funds in Idaho in exchange for its securities, falls outside the scope of legislation enacted for the purpose of regulating the business of insurance. Therefore, insofar as Idaho Code § 41-2819 requires an insurance holding company to obtain a solicitation permit for subsequent financing prior to soliciting investors for federally covered securities under a Rule 506 of Regulation D offering, a court of competent jurisdiction would likely find it is preempted by NSMIA.

AUTHORITIES CONSIDERED

1. Idaho Code:
   Idaho Code § 41-2819.

2. Federal Statutes:
   15 U.S.C. § 77r.
   15 U.S.C. § 1012.
   National Securities Markets Improvement Act of 1996 (Public Law No. 104-290, 110 Stat. 3416).

3. Cases:
   Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 116 S. Ct. 1103, 134 L. Ed. 2d 237 (1996).
   Patenaude v. Equitable Life Assurance Society of the United States, 290 F.3d 1020 (9th Cir. 2002).
   Rush Prudential HMO, Inc. v. Moran, 122 S. Ct. 2151 (June 20, 2002).
   Securities and Exchange Commission v. National Securities, Inc., 393 U.S. 453, 462, 89 S. Ct. 564, 21 L. Ed. 2d 668 (1969).
   Union Labor Life Insurance Co. v. Pireno, 458 U.S. 119, 129, 102 S. Ct. 3002, 3008, 73 L. Ed. 2d 647 (1982).
   United States Department of Treasury v. Fabe, 508 U.S. 491, 113 S. Ct. 2202, 124 L. Ed. 2d 449 (1993).

DATED this 28th day of June, 2002.

ALAN G. LANCE
Attorney General

Analysis by:
THOMAS A. DONOVAN
Deputy Attorney General
Intergovernmental & Fiscal Law Division