BILL ANALYSIS Ó AB 2160 Page 1 ASSEMBLY THIRD READING AB 2160 (Blumenfield and Feuer) As Amended May 9, 2012 Majority vote INSURANCE 8-3 ----------------------------------------------------------------- |Ayes:|Solorio, Bradford, | | | | |Charles Calderon, Carter, | | | | |Feuer, Hayashi, Skinner, | | | | |Torres | | | | | | | | |-----+--------------------------+-----+--------------------------| |Nays:|Hagman, Beth Gaines, | | | | |Miller | | | | | | | | ----------------------------------------------------------------- SUMMARY : Prohibits the use of investments in companies doing business in the energy and military sectors of Iran to satisfy an insurer's capital requirements. Specifically, this bill : 1)Finds and declares that: a) The Securities and Exchange Commission has determined that business activities in foreign states sponsoring terrorism, such as Iran, that are subject to sanctions by the United States may materially harm the share value of foreign companies. Shares in these foreign companies may be held in the portfolio of insurance companies issuing policies to California consumers; b) Publicly traded companies in the United States are substantially restricted in doing business in or with foreign states sponsoring terrorism, such as Iran; c) Identifying companies with business activities in foreign states such as Iran that sponsor terrorism and ensuring that those investments are financially sound is an important public policy priority; and, d) It is the Government of Iran, and not the people of Iran, that is responsible for Iran's support of terrorism and which commits egregious violations of human rights AB 2160 Page 2 under which its own citizens are required to live. 2)Defines "business operations" as maintaining, selling, or leasing equipment, facilities, personnel, or any other apparatus of business or commerce in Iran, including the ownership or possession of real or personal property located in Iran. 3)Defines "company" as a sole proprietorship, organization, association, corporation, partnership, venture, or other entity, its subsidiary or affiliate, including a company owned or controlled, either directly or indirectly, by the government of Iran, that is established or organized under the laws of or has its principal place of business in the Islamic Republic of Iran. 4)Defines "Government of Iran" as the government of Iran or its instrumentalities or political subdivisions including an individual, company, or public agency located in Iran that provides material or financial support to the Islamic Republic of Iran. 5)Defines "invest" or "investment" as the purchase, ownership, or control of stock of a company, association, or corporation, the capital stock of a mutual water company or corporation, bonds issued by the government or a political subdivision of Iran, corporate bonds or other debt instruments issued by a company, or the commitment of funds or other assets to a company, including a loan or extension of credit to that company. 6)Defines "Iran" as the Islamic Republic of Iran or a territory under the administration or control of Iran. 7)Provides that any indirect investment of a domestic insurer in any company included in the list of companies doing business in Iran (DGS list) published by the Department of General Services (DGS) shall be treated as a nonadmitted asset on financial statements filed with the Insurance Commissioner (commissioner). 8)Requires domestic insurers doing business in California to annually determine if they have investments in companies on the DGS list. AB 2160 Page 3 9)Provides that domestic insurers utilizing the DGS list to determine whether it has investments in Iran will be automatically deemed compliant with this bill by the Department of Insurance. 10) Provides that use of the DGS list by a domestic insurer shall be deemed automatic compliance by the Department of Insurance (department). 11) Requires domestic insurers to annually provide the department a list of investments the insurer has in companies on the DGS list and a detailed summary of the business operations these companies have in Iran. 12) Provides that if an insurer sells or transfers all of its investments in companies on the DGS list the insurer is not subject to the requirements in this bill. 13)Specifies that the bill shall cease to be operative if both of the following occur: a) Iran is removed from the State Department's list of countries that provide support for acts of international terrorism; and, b) The President determines and certifies to Congress that Iran has ceased its efforts to design, develop, manufacture, or acquire a nuclear explosive device or related materials and technology. EXISTING LAW : 1)Prohibits a person that provides goods or services of $20 million or more in the energy sector of Iran, as identified in the list created by DGS, or a financial institution that extends $20 million or more in credit to such a person, from bidding on or entering into a contract for goods or services of $1 million or more with a public entity. 2)Defines "person" as a natural person, corporation, company, AB 2160 Page 4 limited liability company, business association, partnership, society trust, or any other nongovernmental entity, organization or group, any governmental entity or instrumentality of a government, including a multilateral development institute, or any successor, parent entity, or subsidiary of any of these entities. 3)Requires DGS to develop, or contract to develop, a list of persons it determines engage in investment activities in Iran and update the list at least every 180 days. DGS is required to develop this list using credible information available to the public. 4)Provides that under specified circumstances a public entity may permit a person engaged in investment activities in Iran to be eligible to enter into a contract for goods and services of $1 million or more. These circumstances include that the investments were made before July 1, 2010, or the investments have not been expanded after July 1, 2010, or the awarding body determines that it is in the best interest of the state or local public entity to contract with the person. 5)Prohibits domestic insurers from acquiring any investment respecting a foreign jurisdiction, or any investment denominated in the currency of that foreign jurisdiction, if that jurisdiction is designated as a state sponsor of terrorism by the US Secretary of State pursuant to federal laws. FISCAL EFFECT : Unknown, but potentially significant litigation costs. COMMENTS : Purpose . According to the author, although California law prohibits California-based insurance companies from acquiring direct investments in Iran and other countries that are designated as state sponsors of terrorism by the United Sates Secretary of State, it allows insurance companies to invest in companies that help spur Iran's nuclear weapon capabilities. In June 2009, the California's Insurance Commissioner uncovered billions of dollars of such indirect investments. This bill will explicitly allow the Commissioner to target these investments by withholding credit for these investments on the financial AB 2160 Page 5 statements submitted by domestic insurers. The serious and urgent nature of the threat from Iran demands that states, together with the federal government, do everything possible diplomatically, politically, and economically to prevent Iran from acquiring a nuclear weapons capability. It is the responsibility of the commissioner to decide whether or not domestic insurance companies have financially sound investments and have enough capital to cover their claims. It is then the prerogative of California not to engage in business with foreign companies or help facilitate the efforts of the Government of Iran that place those companies at risk from the impact of economic sanctions for committing egregious violations of human rights, proliferating nuclear weapons capabilities, and supporting terrorism. Sanctions . The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA), built on prior federal legislation imposing sanctions on Iran by adding new economic penalties aimed at persuading Iran to change its conduct. CISADA sanctions target a range of business activity including businesses involved in the sale of refined petroleum products to Iran, support for Iran's domestic refining efforts, international banking institutions involved with Iran's military, with Iran's nuclear program, and its support for terrorism. CISADA imposed restrictions on foreign financial institutions doing business with key Iranian banks or the Iranian military. Divestment . CISADA authorizes states and local governments to prohibit investment of state or local government assets in, or to divest the assets of the state or local government from, any person that the state or local government determines engages in investment activities in Iran of $20 million or more in the energy sector of Iran or is a financial institution that extends $20 million or more in credit for investment in the energy sector of Iran. In response, the California Legislature enacted AB 1650 (Feuer), Chapter 573, Statutes of 2010, to prohibit a person that provides goods or services of $20 million or more in the energy sector of Iran, as identified in the list created by the DGS, or a financial institution that extends $20 million or more in credit to such a person, from bidding on or entering into a AB 2160 Page 6 contract for goods or services of $1 million or more with a public entity. The DGS reports that this state list is expected to be completed in August of this year. Federal preemption . Federal law generally reserves the conduct of foreign policy for the President and Congress. A series of decisions from the Supreme Court have clearly established that actions by state and local governments that infringe on the conduct of foreign policy by the federal government are pre-empted by federal law. In fact, Courts have ruled that state action is pre-empted even when the federal government has taken no action on a particular foreign policy issue. One notable case (American Insurance Association, et al., v. John Garamendi, Insurance Commissioner, 539 U.S. 396; 123 S. Ct. 2374) in this line of decisions overturned California's Holocaust Victim Insurance Relief Act (HVIRA). HVIRA was enacted in California and required insurance companies doing business in California to disclose policies sold in Europe from 1920 to 1945. The Court ruled that HVIRA was pre-empted by federal law in 2003. In February of this year, the Ninth Circuit Court of Appeals overturned a California statute that extended the statute of limitations for, and allowed California courts to hear, cases regarding insurance claims brought by victims of the Armenian Genocide (Movsesian v. Victoria Versicherung AG, 670 F.3d 1067). The Court ruled, in a unanimous en-banc decision, that the statute was pre-empted by federal law. In its opinion, the court described the fate of state actions related to foreign policy concerns as follows, "Courts have consistently struck down state laws which purport to regulate an area of traditional state competence, but in fact, affect foreign affairs." The case law is not limited to these two California efforts that seek to remedy problems involving foreign countries. A number of states have sought to enact well-reasoned efforts to respond to the past or present activities of foreign governments. These efforts have been consistently struck down. There is substantial similarity between this bill and other state legislation that has been overturned by the courts. If this bill becomes law and subject to a legal challenge, it is reasonable to expect it would be overturned as well. Settlement . The department recently settled litigation regarding actions taken by the previous commissioner that, among AB 2160 Page 7 other things, would have (like this bill) treated indirect investments in Iran's energy and military sectors as non-admitted assets. The settlement agreement resulted in the department abandoning that policy. The settlement allows the department to continue publishing a list of companies that do business with Iran's energy and military sectors, and identifying those insurance companies with investments in those companies, on the department's Web site. The settlement agreement also prohibits the department from using any administrative action to pressure or punish insurance companies with investments in listed companies, and favoring any insurance company that divests from listed companies. Given the history of litigation leading to this settlement, it is reasonable to expect this bill, should it become law, would be subject to a legal challenge as well. The department is required by the State Constitution to defend state law against a federal preemption challenge to the Court of Appeals. The cost of such a defense is expected to be several hundred thousand dollars assuming the department is represented by the Attorney General (AG). However, since the AG represented the department in the litigation concluding in the recent settlement, the AG may decide against representing the department in another lawsuit on the same subject. Should the department have to retain private counsel for litigation relating to this bill, the costs would be substantially higher. Amendments . The bill was amended in the Assembly Insurance Committee to provide domestic insurers with greater certainty regarding which investments are affected by the bill. The amendments eliminated the mandate for the commissioner to determine whether a particular company is either directly or indirectly investing in Iran. The bill now requires the commissioner to use an existing list of companies doing business with Iran developed by DGS. The DGS list is developed and updated by an established process with accepted definitions and opportunities for public input. Analysis Prepared by : Paul Riches / INS. / (916) 319-2086 FN: 0003611 AB 2160 Page 8