BILL NUMBER: AB 1355 CHAPTERED 09/22/03 CHAPTER 445 FILED WITH SECRETARY OF STATE SEPTEMBER 22, 2003 APPROVED BY GOVERNOR SEPTEMBER 20, 2003 PASSED THE ASSEMBLY SEPTEMBER 9, 2003 PASSED THE SENATE SEPTEMBER 8, 2003 AMENDED IN SENATE JULY 7, 2003 AMENDED IN ASSEMBLY APRIL 21, 2003 INTRODUCED BY Assembly Member Wiggins FEBRUARY 21, 2003 An act to amend Sections 273, 506, 645, 646, 687, 688, 1547, 1780, 1938, 3359, 3369, 3376, 14256, 16201, and 16901 of, to add Section 216.3 to, and to repeal Section 14210 of, the Financial Code, relating to financial institutions. LEGISLATIVE COUNSEL'S DIGEST AB 1355, Wiggins. Financial institutions. Existing law provides for the regulation of banks, savings associations, credit unions, industrial loan companies, and institution-affiliated parties of savings associations by the Commissioner of Financial Institutions. Existing law authorizes the commissioner to issue an order suspending or removing a subject person of a bank or a subject person of an industrial loan company, or censuring or suspending an officer, director, or employee of a credit union, or to impose a civil penalty on a savings association or institution-affiliated party of a savings association if that person, association, or party has violated the law regulating those financial institutions. This bill would authorize the commissioner to levy civil penalties against specified licensee financial institutions and subsidiaries of those licensees for violating the laws regulating the particular category of financial institution. The bill would make related changes to the provisions imposing penalties on those licensee financial institutions and their subsidiaries. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 216.3 is added to the Financial Code, to read: 216.3. (a) For purposes of this section, the following definitions apply: (1) "Applicable Law" means: (A) With respect to any bank, Division 1.5 (commencing with Section 4800), and any of the following provisions of Division 1 (commencing with Section 99) of the Financial Code: (i) Article 5 (commencing with Section 270) of Chapter 2. (ii) Article 3 (commencing with Section 640) of Chapter 5. (iii) Article 4.5 (commencing with Section 670) of Chapter 5. (iv) Article 6 (commencing with Section 690) of Chapter 5. (v) Chapter 6 (commencing with Section 750). (vi) Chapter 10 (commencing with Section 1200). (vii) Article 1 (commencing with Section 1400) of Chapter 11. (viii) Chapter 12 (commencing with Section 1500). (ix) Chapter 13.5 (commencing with Section 1700). (x) Section 1936. (xii) Section 1937. (xiii) Section 1938. (xiv) Section 1939. (xv) Section 1945. (xvi) Section 1951. (xvii) Section 3359. (xviii) Chapter 19 (commencing with Section 3500). (xix) Chapter 21.5 (commencing with Section 3750). (xx) Chapter 22 (commencing with Section 3800). (B) With respect to any savings association, any provision of Division 1.5 (commencing with Section 4800) and Division 2 (commencing with Section 5000). (C) With respect to any issuer of travelers checks, any provision of Chapter 14A (commencing with Section 1851) of Division 1. (D) With respect to any insurance premium finance company, any provision of Division 7 (commencing with Section 18000). (E) With respect to any business and development corporation, any provision of Division 15 (commencing with Section 31000). (F) With respect to any credit union, any of the following provisions: (i) Section 14252. (ii) Section 14253. (iii) Section 14255. (iv) Article 4 (commencing with Section 14350) of Chapter 3 of Division 5. (v) Section 14401. (vi) Section 14404. (vii) Section 14408, only as that section applies to gifts to directors, volunteers, and employees, and the related family or business interests of the directors, volunteers, and employees. (viii) Section 14409. (ix) Section 14410. (x) Article 5 (commencing with Section 14600) of Chapter 4 of Division 5. (xi) Article 6 (commencing with Section 14650) of Chapter 4 of Division 5, excluding subdivision (a) of Section 14651. (xii) Section 14803. (xiii) Section 14851. (xiv) Section 14858. (xv) Section 14860. (xvi) Section 14861. (xvii) Section 14863. (G) With respect to any person licensed to transmit money abroad, any provision of Chapter 14 (commencing with Section 1800). (H) With respect to any person licensed to sell payment instruments, any provision of Division 16 (commencing with Section 33000). (2) "Licensee" means any bank, savings association, credit union, transmitter of money abroad, issuer of payment instruments, issuer of travelers checks, insurance premium finance agency, or business and industrial development corporation that is authorized by the commissioner to conduct business in this state. (b) Notwithstanding any other provision of this code that applies to a licensee or a subsidiary of a licensee, after notice and an opportunity to be heard, the commissioner may, by order that shall include findings of fact which incorporates a determination made in accordance with subdivision (e), levy civil penalties against any licensee or any subsidiary of a licensee who has violated any provision of applicable law, any order issued by the commissioner, any written agreement between the commissioner and the licensee or subsidiary of the licensee, or any condition of any approval issued by the commissioner. Notwithstanding any other provision of law, neither the commissioner nor any employee of the department shall disclose or permit the disclosure of any record, record of any action, or information contained in a record of any action, taken by the commissioner under the provisions of this section, unless the action was taken pursuant to paragraph (2) of subdivision (b), to persons other than federal or state government employees who are authorized by statute to obtain the records in the performance of their official duties, unless the disclosure is authorized or requested by the affected licensee or the affected subsidiary of the licensee. The commissioner shall have the sole authority to bring any action with respect to a violation of applicable law subject to a penalty imposed under this section. Except as provided in paragraphs (1) and (2) , any penalty imposed by the commissioner may not exceed one thousand dollars ($1,000) a day, provided that the aggregate penalty of all offenses in any one action against any licensee or subsidiary of a licensee shall not exceed fifty thousand dollars ($50,000). (1) If the commissioner determines that any licensee or subsidiary of the licensee has recklessly violated any applicable law, any order issued by the commissioner, any provision of any written agreement between the commissioner and the licensee or subsidiary, or any condition of any approval issued by the commissioner, the commissioner may impose a penalty not to exceed five thousand dollars ($5,000) per day, provided that the aggregate penalty of all offenses in an action against any licensee or subsidiary of a licensee shall not exceed seventy-five thousand dollars ($75,000). (2) If the commissioner determines that any licensee or subsidiary of the licensee has knowingly violated any applicable law, any order issued by the commissioner, any provision of any written agreement between the commissioner and the licensee or subsidiary, or any condition of any approval issued by the commissioner, the commissioner may impose a penalty not to exceed ten thousand dollars ($10,000) per day, provided that the aggregate penalty of all offenses in an action against any licensee or subsidiary of a licensee shall not exceed 1 percent of the total assets of the licensee or subsidiary of a licensee subject to the penalty. (c) Nothing in this section shall be construed to impair or impede the commissioner from pursuing any other administrative action allowed by law. (d) Nothing in this section shall be construed to impair or impede the commissioner from bringing an action in court to enforce any law or order he or she has issued, including orders issued under this section. Nothing in this section shall be construed to impair or impede the commissioner from seeking any other damages or injunction allowed by law. (e) In determining the amount and the appropriateness of initiating a civil money penalty under subdivision (b), the commissioner shall consider all of the following: (1) Evidence that the violation or practice or breach of duty was intentional or was committed with a disregard of the law or with a disregard of the consequences to the institution. (2) The duration and frequency of the violations, practices, or breaches of duties. (3) The continuation of the violations, practices, or breaches of duty after the licensee or subsidiary of the licensee was notified, or, alternatively, its immediate cessation and correction. (4) The failure to cooperate with the commissioner in effecting early resolution of the problem. (5) Evidence of concealment of the violation, practice, or breach of duty or, alternatively, voluntary disclosure of the violation, practice, or breach of duty. (6) Any threat of loss, actual loss, or other harm to the institution, including harm to the public confidence in the institution, and the degree of that harm. (7) Evidence that a licensee or subsidiary of a licensee received financial gain or other benefit as a result of the violation, practice, or breach of duty. (8) Evidence of any restitution paid by a licensee or subsidiary of a licensee of losses resulting from the violation, practice, or breach of duty. (9) History of prior violations, practices, or breaches of duty, particularly where they are similar to the actions under consideration. (10) Previous criticism of the institution for similar actions. (11) Presence or absence of a compliance program and its effectiveness. (12) Tendency to engage in violations of law, unsafe or unsound banking practices, or breaches of duties. (13) The existence of agreements, commitments, orders, conditions imposed in writing intended to prevent the violation, practice, or breach of duty. (14) Whether the violation, practice, or breach of duty causes quantifiable, economic benefit or loss to the licensee or the subsidiary of the licensee. In those cases, removal of the benefit or recompense of the loss usually will be insufficient, by itself, to promote compliance with the applicable law, order, or written agreement. The penalty amount should reflect a remedial purpose and should provide a deterrent to future misconduct. (15) Other factors as the commissioner may, in his or her opinion, consider relevant to assessing the penalty or establishing the amount of the penalty. (f) The amounts collected under this section shall be deposited in the appropriate fund of the department. For purposes of this subdivision, the term "appropriate fund" means the fund to which the annual assessments of fined licensees, or the parent licensee of the fined subsidiary, are credited. SEC. 2. Section 273 of the Financial Code is amended to read: 273. If any bank or trust company fails to make timely payment of any assessment made pursuant to Section 270, 271, or 272, the commissioner may, in the commissioner's sole discretion, (a) cancel the certificate of authority of the bank or trust company to conduct a banking or trust business or (b) levy a civil penalty pursuant to Section 216.3. SEC. 3. Section 506 of the Financial Code is amended to read: 506. A bank or trust company which opens a branch office without first obtaining the approval of the commissioner shall be subject to a civil penalty levied pursuant to Section 216.3. SEC. 4. Section 645 of the Financial Code is amended to read: 645. If the commissioner finds that the shareholders' equity of a bank is not adequate or that the making by a bank or by any majority-owned subsidiary of a bank of a distribution to the shareholders of the bank would be unsafe or unsound for the bank, the commissioner may order the bank and its majority-owned subsidiaries not to make any distribution to the shareholders of the bank. In addition to the order authorized by this section, the commissioner may levy a civil penalty against bank pursuant to Section 216.3. SEC. 5. Section 646 of the Financial Code is amended to read: 646. (a) For purposes of Section 506 of the Corporations Code, the making by a bank or by any majority-owned subsidiary of a bank of a distribution to any shareholder of the bank in violation of any provision of this article shall be deemed to be prohibited by, and to be a violation of, Section 500 of the Corporations Code. (b) The commissioner may, in the name of the people of this state, bring or intervene in an action under Section 506 of the Corporations Code for the benefit of a bank against any shareholder of the bank on account of receiving, with knowledge of facts indicating the impropriety thereof, any distribution prohibited by any provision of this article or by any provision of Sections 501, 502, and 503 of the Corporations Code, to the same extent as a creditor of the bank who did not consent to the illegal distribution to the shareholder and who had a valid claim against the bank which arose prior to the time of the illegal distribution to the shareholder and which exceeded the amount of the illegal distribution to the shareholder, might bring the action in the name of the bank. (c) As an alternative to the action provided for in subdivision (b), the commissioner may levy a civil penalty against the bank pursuant to Section 216.3. SEC. 6. Section 687 of the Financial Code is amended to read: 687. (a) For purposes of Section 316 of the Corporations Code, to the extent that the making by a bank or by any majority-owned subsidiary of a bank of a distribution to any shareholder of the bank is contrary to any provision of Article 3 (commencing with Section 640), the making of the distribution shall, to the extent, be deemed to be contrary to the provisions of Section 500 of the Corporations Code. (b) The commissioner may, in the name of the people of this state, bring or intervene in an action under Section 316 of the Corporations Code for the benefit of a bank against any or all of the directors of the bank or of any majority-owned subsidiary of the bank on account of the making of a distribution to any shareholder of the bank contrary to any provision of Article 3 (commencing with Section 640) or any provision of Sections 501, 502, and 503 of the Corporations Code, to the same extent as a creditor of the bank who did not consent to the illegal distribution and who had a valid claim against the bank which arose prior to the time of the illegal distribution, and which exceeded the amount of the illegal distribution, may bring the action in the name of the bank. (c) As an alternative to the action provided for in subdivision (b), the commissioner my levy a civil penalty against the bank pursuant to Section 216.3. SEC. 7. Section 688 of the Financial Code is amended to read: 688. (a) For purposes of Section 316 of the Corporations Code, the making of a loan or guarantee by a bank or any other extending of credit by a bank contrary to any provision of this division shall be deemed to be contrary to Section 315 of the Corporations Code. (b) The commissioner may, in the name of the people of this state, bring or intervene in an action under Section 316 of the Corporations Code for the benefit of a bank against any or all of the directors of the bank on account of the making of a loan or guarantee or any other extending of credit contrary to any provision of this division, to the same extent as a creditor of the bank who did not consent to the illegal making of the loan or guarantee or the other illegal extending of credit and who had a valid claim against the bank which arose prior to the time of the illegal making of the loan or guarantee or the other illegal extending of credit and which exceeded the amount of loss suffered by the bank as a result of the illegal making of the loan or guarantee or the other illegal extending of credit, might bring the action in the name of the bank. (c) As an alternative to the action provided for in subdivision (b), the commissioner may levy a civil penalty against the bank pursuant to Section 216.3. SEC. 8. Section 1547 of the Financial Code is amended to read: 1547. The commissioner may, pursuant to Section 216.3, levy a civil penalty against any trust company that fails to comply with this article. SEC. 9. Section 1780 of the Financial Code is amended to read: 1780. If the commissioner finds that any person has violated any provision of this chapter or of any regulation or order issued under this chapter, the commissioner may order the person to pay to the commissioner a civil penalty imposed pursuant to Section 216.3. SEC. 10. Section 1938 of the Financial Code is amended to read: 1938. (a) Each report required under this article, Chapter 13.5 (commencing with Section 1700), or Chapter 22 (commencing with Section 3800) shall be filed with the commissioner at the time that the commissioner may by regulation or order require. If any bank, trust company, or foreign bank fails to make any report required by this article, Chapter 13.5 (commencing with Section 1700), or Chapter 22 (commencing with Section 3800) at the time specified by the commissioner or fails to include therein any matter required by this article, Chapter 13.5 (commencing with Section 1700), or Chapter 22 (commencing with Section 3800) or by the commissioner, it shall be liable to the people of this state in the sum of not more than one hundred dollars ($100) for each day that the report is delayed or withheld by the failure or neglect of the bank, trust company, or foreign bank. (b) The provisions of Section 216.3 shall not apply to this section. SEC. 11. Section 3359 of the Financial Code is amended to read: 3359. (a) For purposes of this section, the following terms have the following meanings: (1) "Carrying a security" means maintaining, reducing, or retiring indebtedness originally incurred to acquire a security. (2) "Controlling person" has the same meaning specified in Section 700. (3) "Security" has the following meanings: (A) When used with respect to a bank, "security" has the same meaning set forth in subdivision (c) of Section 690. (B) When used with respect to any other person, "security" has the same meaning set forth in Section 25019 of the Corporations Code. (b) No bank shall acquire, hold, extend credit on the security of, or extend credit for the purpose of acquiring or carrying, any security of the bank or of any controlling person of the bank. (c) (1) Any bank which acquires or holds securities in violation of this section shall be liable to the people of this state for twice the market, book, or face value of the securities, whichever is greatest. (2) Any bank which extends credit in violation of this section shall be liable to the people of this state for twice the amount of the credit so extended. (d) This section does not apply to any of the following transactions: (1) Any acquisition or extension of credit by a bank which is necessary to reduce or prevent loss to the bank on debts previously contracted in good faith. (2) Any redemption by a bank of any of its redeemable shares in accordance with applicable provisions of this division and of Division 1 (commencing with Section 100) of Title 1 of the Corporations Code. (3) Any acquisition by a bank of any of its shares, other than an acquisition of the type described in paragraph (1) or (2), if the acquisition is approved in advance by the commissioner. (e) The provisions of Section 216.3 shall not apply to this section. SEC. 12. Section 3369 of the Financial Code is amended to read: 3369. (a) Any person who willfully and knowingly makes, circulates, or transmits to another or others, any statement or rumor, written, printed, or by word of mouth, which is untrue in fact and is directly or by inference derogatory to the financial condition or affects the solvency or financial standing of any bank doing business in this State, or who knowingly counsels, aids, procures, or induces another to start, transmit, or circulate any such statement or rumor, is guilty of a misdemeanor punishable by a fine of not more than one thousand dollars ($1,000) or by imprisonment for not more than one year, or both. (b) The provisions of Section 216.3 shall not apply to this section. SEC. 13. Section 3376 of the Financial Code is amended to read: 3376. Any bank that makes an extension of credit in violation of this article is subject to a civil penalty pursuant to Section 216.3. Any person, other than the bank making the extension of credit, who knowingly makes or procures an extension of credit in violation of this article is guilty of a felony. SEC. 14. Section 14210 of the Financial Code is repealed. SEC. 15. Section 14256 of the Financial Code is amended to read: 14256. (a) If any credit union fails to file with the commissioner any report required by this division on or before the day designated for the filing of the report or, if the time for filing the report is extended by the commissioner, within the extended time, or fails to include in the report any matter required by the commissioner, the failure is grounds for the suspension or revocation of the certificate authorizing the credit union to act as a credit union. (b) If any credit union fails to file with the commissioner any report required by this division or by any order or regulation of the commissioner, on or before the day designated for the filing of the report or, if the time for filing the report is extended by the commissioner, within the extended time, or fails to include in the report any matter required by the commissioner, the commissioner may order the credit union to pay to the commissioner a civil penalty imposed pursuant to Section 216.3. SEC. 16. Section 16201 of the Financial Code is amended to read: 16201. If, after notice and hearing, the commissioner finds that any person has violated any provision of this chapter or of any regulation or order issued under this chapter, the commissioner may order the person to pay to the commissioner a civil penalty imposed pursuant to Section 216.3. SEC. 17. Section 16901 of the Financial Code is amended to read: 16901. If, after notice and hearing, the commissioner finds that any person has violated any provision of this chapter or of any regulation or order issued under this chapter, the commissioner may order the person to pay to the commissioner a civil penalty imposed pursuant to Section 216.3.