Category: Blue Sky, Compliance

Why Does Blue Sky Compliance Remind Me of the IRS?


statesFocus on compliance has elevated within fund boards, and a fairly recent hot topic has been compliance with state Blue Sky laws and regulations. Blue Sky related expenses are receiving increased attention as a direct result of the fact that a number of states have increased their notice filing fees during the past five years. But let’s understand what Blue Sky compliance represents and try to answer the question – is it more like something from the SEC or the IRS?

Back in 1911, Kansas created the first Blue Sky laws to protect its citizens from con men disguised as investment professionals. Similar to current laws, securities needed to be registered with the state prior to sale. The states would review the prospectus and in some cases request changes if the state examiner determined information was unclear or misleading. Once the state examiner determined the security met the standards for the state, registration was granted. There were fees associated with this initial examination and fees to renew the registrations.

Then something happened along the way, The National Securities Markets Improvement Act of 1996. This amendment to federal securities law preempted the states’ securities regulations.  Translation: the individual states could no longer require federally-covered securities, like mutual funds, to be registered. Sounds like a free pass, right?  Wrong, here is where my IRS comparison comes in. The states were allowed to require a notice filing, which means you are not actually registering, but giving notice of intent to offer or sell in the state. So the state can no longer examine your filing to determine your qualification to register, which is done by the SEC, but they can require you to give notice – and pay a fee to do so. Is this starting to sound like a revenue collection agency?

Every state has unique Blue Sky laws and regulations. Fortunately, the majority of the states do not require sales reporting. It is for the remaining twenty-two states that base notice filing fees on sales that we must begin to think like tax accountants and find exemptions to reduce the amount of sales reported.  The keys to a robust Blue Sky compliance program include determining your level of risk, understanding the sources of your sales, researching exemption criteria, and documenting your decisions. Short of not offering your funds, it is impossible to avoid paying state fees, but with planning there may be opportunities to lower them.

Kevin Caravella

Kevin Caravella

As Vice President, Kevin is responsible for all aspects of Blue Sky Administration including service delivery excellence, relationship management and business development. He has over 26 years of Blue Sky administration experience, including systems and infrastructure development, operations and product distribution. Prior to joining Boston Financial, Kevin served as Vice President in the Asset Servicing Division at Bank of New York. Kevin led the Information Technology and Special Project teams as well as created information technology strategies for numerous product lines associated with state compliance and securities laws. He was also a founding partner at Automated Business Development (ABD) and instrumental in developing the company into a premier software and consulting firm. Kevin holds a Bachelor of Science in Business Administration from Boston University with a concentration in Management Information Systems.


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