BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 979
                                                                  Page  1

          Date of Hearing:   July 2, 2012

                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE
                                   Mike Eng, Chair
                      SB 979 (Vargas) - As Amended:  May 1, 2012

           SENATE VOTE  :   38-0
           
          SUBJECT  :   Financial institutions.

           SUMMARY  :   Requires the Commissioner of the Department of 
          Financial Institutions (DFI) to make its formal, final 
          enforcement actions public on their Internet Web site.   
          Specifically,  this bill  :   

          1)Specifies that if the commissioner makes a determination in 
            writing that the publication of a final order or decision 
            would seriously threaten the safety or soundness of a 
            regulated institution subject to that order or decision, the 
            commissioner may delay publication of the order or decision 
            for a reasonable time.

          2)Specifies that if the commissioner makes a determination that 
            the publication of a final order or decision would reveal 
            information which would identify a customer of the institution 
            subject to the order, the commissioner may redact from the 
            order, prior to publication, any information that, in the 
            determination of the commissioner, would identify any customer 
            of the subject institution.

          3)Makes other technical changes. 

           EXISTING LAW  

          1)Authorizes the Commissioner of DFI to do all of the following:

             a)   Issue a cease and desist order to an unlicensed person 
               who the commissioner finds is engaging in activities that 
               require a license from DFI, without having obtained that 
               license (Financial Code, Section 567);

             b)   Issue a cease and desist order to a licensee, officer or 
               employee of a licensee, or holding company of a licensee, 
               which the commissioner finds is violating, or is about to 
               violate any statute, regulation, or order of the 








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               commissioner, following notice and an opportunity for the 
               accused to be heard (Financial Code, Section 580);

             c)   Issue a cease and desist order to a licensee, officer or 
               employee of a licensee, or holding company of a licensee, 
               without prior notice and an opportunity for the accused to 
               be heard, when the commissioner finds that the accused is 
               engaging in, or is about to engage in a violation that may 
               cause the insolvency of the institution, significantly 
               dissipate the assets or earnings of the institution, weaken 
               the institution, or otherwise prejudice the interests of 
               the customers of the institution (Financial Code, Section 
               581); 

             d)   Order a licensee whose books or records are so 
               incomplete or inaccurate that the commissioner is unable to 
               determine the financial condition of the licensee or the 
               details or purpose of any transaction(s) that may 
               materially affect the financial condition of the licensee 
               to cease any activity that gave rise to the incomplete or 
               inaccurate state of the books or records, or take 
               affirmative action to restore the books or records to a 
               complete and accurate state (Financial Code, Section 582);

             e)   Suspend or remove officers or employees of licensees or 
               their holding companies, and prohibit them from 
               participating in the conduct of the affairs of the licensee 
               or holding company, if, after notice and an opportunity for 
               the accused to be heard, the commissioner finds that the 
               officer or employee has violated or caused an institution 
               to violate any statute, regulation, or order of the 
               commissioner; engaged or participated in any unsafe or 
               unsound act in connection with the business of the 
               licensee, its holding company, or another business; or 
               breached his or her fiduciary duty (Financial Code, Section 
               585);

             f)      Take the actions described in "e" above, without 
               prior notice and an opportunity for the accused to be 
               heard, if the commissioner finds that such action is 
               necessary or advisable for the protection of the licensee, 
               its holding company, or the rights or interests of 
               customers or members of the licensee (Financial Code, 
               Section 586);









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             g)   Suspend or remove any officer or employee of a licensee 
               or its holding company, without prior notice or an 
               opportunity for the accused to be heard, if they have been 
               indicted or convicted of a criminal violation involving 
               dishonesty or breach of trust, a criminal violation of 
               specified provisions of the Financial Code, a criminal 
               violation of specified federal statutes, or a criminal 
               violation of a law of any jurisdiction other than the 
               United States that is substantially similar to the 
               specified federal statutes, as specified (Financial Code, 
               Section 587);

             h)   Modify or rescind an order issued pursuant to Sections 
               585 through 587, upon an application from a licensee or 
               current or former officer or employee of a licensee to 
               whom/which an order is issued (Financial Code, Section 
               588);

             i)      Suspend or revoke any license if, after notice and an 
               opportunity for the accused to be heard, the commissioner 
               finds that (Financial Code, Section 590).

               i)     The licensee has violated any applicable statute, 
                 regulation, or order of the commissioner, or any 
                 provision of any written agreement between the licensee 
                 and the commissioner, or any condition imposed on any 
                 written approval granted by the commissioner;

               ii)    Any fact or condition exists which, if it had 
                 existed at the time of the original application for the 
                 license, would have resulted in denial of the license; 

               iii)   The licensee is conducting its business in an unsafe 
                 or unsound manner;

               iv)    The licensee has inadequate capital or net worth or 
                 is insolvent, or is in such condition that it is unsafe 
                 or unsound for the licensee to transact licensee 
                 business;

               v)     The licensee failed to pay any of its obligations as 
                 they came due, or is reasonably expected to be unable to 
                 pay its obligations as they come due;

               vi)    The licensee has sought bankruptcy relief;








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               vii)   The licensee refused to submit its books, papers, 
                 and affairs to the inspection of any DFI examiner, or any 
                 officer of the licensee refused to be examined upon oath 
                 regarding the affairs of the licensee; or,

               viii) The licensee, with the approval of its board, asked 
               the commissioner to take 
                       possession of its property and business.           

             j)   Suspend or revoke any license, without prior notice and 
               opportunity for the accused to be heard, if the 
               commissioner finds that any of the factors described 
               immediately above in "i" is true, and that immediate 
               suspension or revocation of a license is necessary for the 
               protection of the public (Financial Code, Section 591); 
               and, 

             aa)  Take control of the property and business of any 
               licensee, without prior notice and opportunity for the 
               accused to be heard, if the commissioner finds that any of 
               the factors described immediately above in "i" is true 
               (Financial Code, Section 592), and notify the fact of that 
               control to all persons holding or having assets of the 
               licensee in their possession (Financial Code, Section 594).

           FISCAL EFFECT  :   Unknown.

           COMMENTS  :   

           Need for the bill  :  According to the author, this  bill is 
          intended to improve transparency of enforcement action brought 
          by DFI and ensure that California's policies regarding the 
          publication of final, formal enforcement action by our financial 
          regulators is consistent with federal transparency policies in 
          this area.  
           
          Background  : DFI regulates California-chartered banks and credit 
          unions, as well as, several other types of financial and money 
          services businesses, such as trust companies and money 
          transmitters.  As part of its regulatory duties, DFI conducts 
          regular examinations of its licensees, and takes enforcement 
          actions, as necessary to ensure that its licensees are operating 
          in a safe and sound manner, and in accordance with state law.  
          During its examination process, DFI routinely makes 








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          recommendations to licensees regarding enhancements they can 
          make to their policies, procedures, internal routines and 
          controls, and comments on other operational matters, with the 
          aim of ensuring the safety and soundness of the institution and 
          the state's financial services system.  Often, these 
          recommendations are informal.  However, when more serious 
          failings are observed, DFI's actions take the form of formal 
          orders.

          Informal actions taken by DFI following an examination of a 
          licensee include making recommendations to the licensee's board 
          of directors within the Report of Examination that is sent to 
          each institution following a regulatory examination.  Sometimes 
          DFI requests that the board/ management of an institution 
          respond with an action plan to address these recommendations.  
          DFI can also require follow-up reports on the progress an 
          institution is making in addressing those recommendations.  
          This bill does not propose to require DFI to make the results of 
          its informal enforcement actions public, because financial 
          institutions typically lack any appeal rights related to these 
          informal actions, and because these actions are typically taken 
          by DFI following the discovery of relatively minor problems at 
          an institution.  

          Formal enforcement actions include cease and desist orders, by 
          which the Commissioner may order an institution to cease and 
          desist from a specific unsafe or unsound act or a violation of 
          applicable law.  Other formal enforcement actions include the 
          removal of a person from office at a licensee, the revocation or 
          suspension of a license held by a licensee, a decision to take 
          possession of the property and business of a licensee, a 
          decision to impose civil penalties on a licensee for a violation 
          or violations of applicable law, and a decision to refer a 
          licensee to the State Attorney General for criminal prosecution. 
           These formal enforcement actions do include appeal rights, and 
          do not become final, until a licensee either waives its right to 
          appeal or exhausts its administrative appeal rights pursuant to 
          the Administrative Procedures Act.  It is these final, formal 
          enforcement orders that this bill requires DFI to make public.  
          DFI does not currently make these enforcement actions public.

          All of the federal depository institution regulators, including 
          the Office of the Comptroller of the Currency, Federal Reserve 
          Board, Federal Deposit Insurance Corporation, and National 
          Credit Union Administration, make their final, formal 








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          enforcement actions public.

          This bill also contains an exemption, patterned on a federal law 
          applicable to the National Credit Union Administration, which 
          allows the DFI Commissioner to delay the publication of any 
          final enforcement order or decision, if the DFI Commissioner 
          believes that such publication is likely to seriously threaten 
          the safety or soundness of an institution subject to that order 
          or decision.  
           
          Prior Legislation

           SB 706 (Price) Chapter 712, Statutes of 2011.  This measure 
          required the Department of Real Estate (DRE) to make public, on 
          its Internet Web site the status of every license issued by DRE, 
          including information on suspensions and revocations of 
          licenses, and other related enforcement actions, such as formal 
          accusations.  

           Recommended TECHNICAL Amendment 
           
          On page 2, line 3- delete "his or her" and insert "the 
          department's".  

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          None on file.
           
            Opposition 
           
          None on file.

           Analysis Prepared by  :    Kathleen O'Malley / B. & F. / (916) 
          319-3081