BILL ANALYSIS Ó ----------------------------------------------------------------------- |Hearing Date:April 9, 2012 |Bill No:SB | | |1077 | ----------------------------------------------------------------------- SENATE COMMITTEE ON BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT Senator Curren D. Price, Jr., Chair Bill No: SB 1077Author:Price As Introduced: February 14, 2012 Fiscal:Yes SUBJECT: Alarm companies. SUMMARY: Authorizes a licensed alarm company to be organized as a LLC; authorizes an alarm company to apply to the Bureau of Security and Investigative Services to assign the license to another business entity as long as the direct and indirect owners are unchanged; establishes a comprehensive system for the BSIS to issue a citation and fine not to exceed $5,000 to a person for unlicensed alarm company activities. Existing law: 1)Provides for the licensure and regulation of alarm companies and alarm company managers and employees by the Bureau for Security and Investigative Services (BSIS) within the Department of Consumer Affairs (DCA) under the Alarm Company Act (Business and Professions Code (BPC), Division 3, Chapter 11.6, commencing with § 7590). The BSIS further licenses and regulates security guards, proprietary private security employers, proprietary private security officers, private investigators, alarm companies, locksmiths, private patrol operators, and repossession companies and their employees. 2)Provides that a "licensee" under the Act means a business entity, whether an individual, partnership, or corporation. (BPC § 7590.1) 3)Prohibits an alarm company operator from transferring his or her license to another person, as specified. (BPC § 7599.47) 4)Under a general provision of the BPC, authorizes any board, bureau or commission within DCA to establish by regulation a system for the SB 1077 Page 2 issuance of citations and fines to a licensee for violation of the applicable licensing act. The law makes several exemptions from that authorization, including those regulated under the Alarm Company Act. The citation must be in writing, and describe the violation and the law violated, and any fine assessed may not be for more than $5,000 for each violation. The citation shall also provide the licensee with an opportunity to request an administrative hearing on the citation. (BPC § 125.9) 5)Authorizes any board, bureau or commission within DCA to establish by regulation a system for the issuance of citations and fines to unlicensed persons acting in the capacity of a licensee which meets the requirements of BPC § 125.9. (BPC § 148) 6)Authorizes the BSIS to issue a citation and fine to a licensed alarm company operator, qualified manager, or an alarm agent for specified violations of the Act, and requires the citation to be in writing, containing a written description of the violation, and the provision of law violated. The citation shall contain an order of abatement and shall not exceed $2,500. (BPC 7591.9) 7)The Beverly-Killea Limited Liability Company (LLC) Act prohibits domestic and foreign limited liability companies from rendering professional services in California. (Corporations Code (CC) § 17375). a) Defines "professional services" as "any type of professional services which may be lawfully rendered only pursuant to a license, certification, or registration authorized by the Business and Professions Code, the Chiropractic Act, or the Osteopathic Act." (CC § 13401(a)). b) Explicitly provides that an LLC may render services that may be lawfully rendered only pursuant to a license, certificate, or registration authorized by the BPC if the applicable provisions of the BPC authorize a limited liability company to hold that license, certificate, or registration. (CC§ 17002 (c)) This bill: 1)Authorizes a licensed alarm company to be organized as an LLC, and makes conforming changes to the licensing provisions of the Act. 2)Authorizes an alarm company to apply to the BSIS to assign the license to another business entity as long as the direct and indirect owners are unchanged. SB 1077 Page 3 3)Establishes a processing fee not to exceed $125 for the assignment of an alarm company operator license. 4)Establishes a comprehensive system for the BSIS to issue a citation and fine not to exceed $5,000 to a person for unlicensed activity under the Act. 5)Provides that a citation for unlicensed activity must be in writing and meet the following criteria: a) Describe the nature of the violation and the provision of law violated. b) Inform the cited person that he or she may, within 30 days, request a hearing to contest the citation. c) Inform the cited person that he or she may, within 10 days, request an informal conference on the citation with the chief of BSIS. d) Be served upon the cited person by certified mail. e) Require the BSIS to consider the following factors when determining the amount of an administrative fine: i. The good or bad faith exhibited by the cited person. ii. The nature and severity of the violation. iii. Evidence that the violation was willful. iv. History of violations of the same or similar nature. v. The extent to which the cited person has cooperated with the BSIS. vi. The extent to which the cited person has mitigated or attempted to mitigate any damage or injury caused by the violation. vii. Any other factors as justice may require. 6)Makes technical corrections and conforming changes. FISCAL EFFECT: Unknown. This bill has been keyed "fiscal" by Legislative Counsel. COMMENTS: 1.Purpose. This bill is sponsored by the California Alarm Association SB 1077 Page 4 (Sponsor) to make three changes to the Alarm Company Act. First, the bill authorizes a licensed alarm company to be organized as an LLC, and makes conforming changes in the licensing provisions of the Act. Second, the bill authorizes an alarm company to keep the same alarm license if it changes its business structure. For example, if an alarm company is organized as a corporation and then converts to an LLC, it would be allowed to transfer its license to the new business structure. The bill also establishes a processing fee not to exceed $125 for the assignment of an alarm company operator license. Third, the bill authorizes the BSIS to cite and fine alarm companies operating without a license. According to the Sponsor, the BSIS staff reviewed these provisions and their technical advice is reflected in the bill's language. 2. Background. The BSIS licenses and regulates the private security industry. The BSIS jurisdiction includes, not only alarm companies and their employees, but also security guards, proprietary private security employers, proprietary private security officers, private investigators, alarm companies, locksmiths, private patrol operators, and repossession companies. 3. Unlicensed Activity. Under current law, the BSIS lacks the direct authority to regulate unlicensed alarm companies. When discovering an alarm company is operating illegally without a proper license, the BSIS must rely on the local District Attorney to enforce the Alarm Act. Securing the support of the local DA is difficult, as they often have more pressing issues to deal with. Granting the BSIS direct authority to deal with unlicensed alarm companies will be more efficient and effective in preventing unfair competition in the market place. More importantly, it will also provide greater protection for consumers who may be victimized by unscrupulous alarm companies operating without the proper license and without the background review conducted by the BSIS as a condition of receiving an alarm company license. The BSIS states that: "Identifying unlicensed activity and obtaining compliance from people who are not properly licensed or registered is a high priority for the Bureau. Individuals and businesses that are operating without a license pose a threat to both the industry and the public. The behavior of an unlicensed practitioner often reflects poorly upon the private security industry and can tarnish the industry's reputation. Consumers assume they can afford to be SB 1077 Page 5 less wary because they are dealing with a regulated industry and with licensed practitioners." By giving the BSIS the authority to issue citations and fines to unlicensed alarm company operators, this will enable the Bureau to further address unlicensed practices and obtain greater compliance in order to protect consumers. 4. Engaging in Licensed Practice as an LLC. Limited liability companies are a relatively new form of business entity for the state. Formation and operation of such entities in California was authorized in 1994 through the Beverly-Killea Limited Liability Company Act (SB 469, Chapter 1200, Statutes of 1994). As originally enacted, an uncodified provision specified that nothing in the Act shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in the Corporations Code, unless expressly authorized under applicable provisions of the Business and Professions Code or the Chiropractic Act. This provision was codified in 1999 (SB 284, Kelley, Chapter 1000, Statutes of 1999). Under the Moscone-Knox Professional Corporation Act (Corporations Code § 13400 ff.), "professional services" is defined as any type of professional services that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the Business and Professions Code, the Chiropractic Act, or the Osteopathic Act. The rationale for the exclusion was apparently that service providers who harm others by their misconduct, incompetence, or negligence should not be able to limit their liability by operating as an LLC and thus become potentially judgment-proof. Based upon these provisions of law, it has been commonly understood that the boards and bureaus under the Department of Consumer Affairs are prohibited from issuing a license, certification or registration to an entity organized as an LLC. More recently, SB 392 (Florez, Chapter SB 392, 698, Statutes of 2010) authorized the Contractors State License Board to issue a contractor license to an LLC, and incorporated the LLC business structure into the contractor license provisions. The bill additionally added paragraph (c) to Corporations Code Section 17002 to read "(c) Notwithstanding Section 17375, a limited liability company may render services that may be lawfully rendered only pursuant to a license, certificate, or registration authorized by SB 1077 Page 6 the Business and Professions Code if the applicable provisions of the Business and Professions Code authorize a limited liability company to hold that license, certificate, or registration." Thus, if a licensing law under the BPC specifically authorizes an LLC to hold a license, then an LLC may obtain a professional license under that provision. This bill seeks to make that same authorization for alarm companies. 5. Attorney General Opinion. In 2004, Attorney General Opinion No. 04-103 concluded that a business that provides services requiring a license, certification, or registration pursuant to the Business and Professions Code may conduct its activities as a limited liability company if the services rendered require only a nonprofessional, occupational license. In discussing the distinctions between professional services and nonprofessional occupational services, the AG Opinion further discusses Mann v. Department of Motor Vehicles (1999) 76 Cal.App.4th 312, (Mann), in which the court concluded that the services performed pursuant to a vehicle salesperson license issued under the Vehicle Code were not "professional services," but rather were "nonprofessional, occupational" services. The AG Opinion further states that: "Following the reasoning of Mann, we find that some services that require a license, certification, or registration pursuant to the Business and Professions Code are "professional services" and others are "nonprofessional services." To determine whether a particular service is one or the other requires an examination of the educational, training, and testing prerequisites." 6. Assignment of an Alarm Company License. The law explicitly prohibits an alarm company operator from transferring his or her license to another person, as specified. This bill would authorize an alarm company to keep the same alarm license if it changes its business structure. This would allow an alarm company organized as a corporation to convert its organizational structure to an LLC, and allow the license to be transferred to the new business structure. According to the Sponsor, this change in law will save alarm companies as well as the BSIS, which regulates and licenses alarm companies, from unnecessary work that would otherwise be necessary when applying for a new alarm company license. SB 1077 Page 7 A similar change in code was made for repossessor licenses in 1995 (AB 1541, Lee, Chapter 505, Statutes of 1995). 7. Related Legislation. SB 392 (Florez, Chapter, 698, Statutes of 2010) authorized the Contractors State License Board to issue a contractor license to an LLC, and incorporated the LLC business structure into the contractor license provisions. The bill additionally amended the Corporations Code to authorize an LLC to render services pursuant to a license, certificate, or registration under the BPC if the applicable provisions of the BPC authorize a LLC to hold that license, certificate, or registration. SB 1225 (Harman, Chapter 114, Statutes of 2008) authorized a LLC to operate as a cemetery authority (licensed cemetery) and provide various cemetery and funeral-related services, by employing persons licensed for these services, if the LLC maintains a specified minimum amount of insurance and/or assets. SB 1337 (Correa, 2008) would have allowed a limited liability company to render contractor services that are "professional services" prohibited by the LLC Act, by authorizing the issuance of a contractor's license to a LLC under the BPC. That bill died in Senate Judiciary Committee. AB 2235 (Parra, 2006) would have expanded the definition of "person" under the Real Estate Law to include an LLC. That bill died in the Senate Judiciary Committee without being heard. SB 1022 (Campbell, 2005) sought to authorize professional limited liability companies to provide specified professional services. That bill would have defined "professional services" to mean any type of professional services that may only be lawfully rendered pursuant to a license, certification, or registration under the BPC or the Chiropractic Act. That bill died in the Senate Judiciary Committee without being heard. AB 2724 (Runner, 2002) would authorize contractor's licenses to be issued to limited liability companies that meet certain requirements. That bill died in the Assembly Business and Professions Committee without being heard. AB 2401 (Miller, 1996) would have provided that an LLC may not render professional services, unless the LLC is expressly authorized under the BPC or the Chiropractic Act, or is a real estate broker licensed under the real estate law. The bill sought to amend the contractor, architectural, engineering, and land surveying SB 1077 Page 8 provisions of the B&P Code to authorize the licensure of LLCs. That bill failed passage in Senate Business and Professions Committee. AB 1541 (Lee, Chapter 505, Statutes of 1995) included LLCs in the statutory definition of the types of business entities (e.g., corporations) that can be licensed as repossession agencies, and specified the contents of an application for license by a limited liability company. SB 469 (Killea, Chapter 1200, Statutes of 1994) established the initial LLC Act, to provide for LLCs to organize and do business in California, and allow LLCs organized outside of California to register to do business in California. The bill provided that an LLC may engage in any lawful activity except banking, insurance or trust company operations, and in an uncodified provision, stated that nothing in the Act shall be construed to permit an LLC to render professional services, as defined, for which a license, certification or registration is required, unless expressly authorized under provisions of the B&P Code or the Chiropractic Act. 8. Arguments in Support. In sponsoring the bill, the California Alarm Association states that the original language prohibiting other licensed professions to become LLCs still remains. The Sponsor believes this language is outdated and was adopted before many professional companies, such as alarm companies, began organizing as LLCs. The Sponsor states that forty-nine other states allow alarm companies to organize as LLCs. Consumers will still be able to sue alarm companies organized as LLC for damages in the rare cases where disputes arise. The Sponsor further indicates that the provision allowing an alarm company to keep the same alarm license if it changes its business structure is related to the provision allowing an LLC to hold a license. If an alarm company is organized as a corporation and then converts to an LLC, it would be allowed to transfer its license to the new business structure. This change will save alarm companies and the bureau from unnecessary work that would otherwise be necessary when applying for a new alarm company license. Authorizing the BSIS to issue a citation and fine for unlicensed activity provides greater protection for consumers who may be victimized by unscrupulous alarm companies operating without the proper license and without the background review conducted by the BSIS as a condition of receiving an alarm company license. SB 1077 Page 9 NOTE: Double-referral to Judiciary Committee second. Any amendments proposed to this bill during our hearing should be made in the Senate Judiciary Committee. SUPPORT AND OPPOSITION: Support: California Alarm Association (Sponsor) Opposition: None received as of April 2, 2012 Consultant:G. V. Ayers