BILL ANALYSIS Ó
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Lou Correa, Chair
2013-2014 Regular Session
SB 538 (Hill) Hearing Date: April 3, 2013
As Amended: April 1, 2013
Fiscal: Yes
Urgency: No
SUMMARY Would enact several changes to the Corporate
Securities Law of 1968, to augment the securities law
enforcement resources of the Department of Corporations (DOC)
and streamline the process by which DOC may collect judgments
from securities licensees found to have violated the securities
laws. Would also make a variety of technical changes to other
laws administered by DOC.
DESCRIPTION
1. Would authorize DOC to impose annual renewal fees of up to
$35 on licensed broker-dealer agents and investment adviser
representatives, and would state legislative intent that the
revenue generated from the imposition of these fees be used
by DOC to perform regulatory examinations of its
broker-dealer and investment adviser licensees at least once
every four years, or more often, if deemed necessary for the
protection of the public.
2. Following the exhaustion of review procedures provided in
the Administrative Procedures Act, would authorize the DOC
commissioner to apply to an appropriate superior court for a
judgment in the amount of an administrative penalty granted
pursuant to a final decision of the commissioner, and, if
applicable, pursuant to a final decision of the commissioner
on a claim for ancillary relief such as restitution or
disgorgement. Would require any such application by the
commissioner to a superior court to include a certified copy
of the commissioner's final decision, and would provide that
any such application shall constitute a sufficient showing
to warrant the issuance of a judgment and order by that
superior court.
3. Would expand the types of securities law violations for
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which DOC is authorized to issue desist and refrain (D&R)
orders, by authorizing the issuance of D&Rs for any
violation of the Corporate Securities Law of 1968 (Division
1 of Title 4 of the Corporations Code) or any rule adopted
or order issued pursuant to that division.
4. Would update the anti-fraud language in California's
securities law to ensure consistency with federal anti-fraud
language, by providing that it is unlawful for any person,
in connection with the offer, sale, or purchase of a
security, directly or indirectly, to employ a device,
scheme, or artifice to defraud; make an untrue statement of
material fact or fail to state a material fact necessary to
make the statements made, in light of the circumstances
under which they were made, not misleading; or engage in an
act, practice, or course of business that operates or would
operate as a fraud or deceit upon another person.
5. Would exempt California limited partnerships and limited
liability companies that apply to DOC for qualification for
the sale of securities or that file requests for or notices
of exemption from qualification for the sale of securities
with DOC from the requirement to file consents to service of
process with DOC.
6. Would amend the Commodities Law (administered by DOC) to
provide that a request for hearing to dispute the issuance
of a D&R must be made within 30 days of service of the
order, rather than within one year of service of the order,
and would provide that if a person who is served with a D&R
fails to file a written request for a hearing within 30 days
from the date that D&R is served, the D&R shall be deemed
final.
7. Would correct code section references and make other minor
technical changes.
EXISTING LAW
1. Provides for the Corporate Securities Law of 1968,
administered by DOC (Corporations Code Sections 25000 et
seq.), to govern the issuance and sale of securities in
California. Among its many provisions, the Corporate
Securities Law of 1968:
a. Provides that it is unlawful for any person to offer
SB 538 (Hill), Page 3
or sell any security in this state, unless such sale has
been qualified by the Commissioner of Corporations, as
specified, or unless the sale is covered by an express
exemption from qualification (Corporations Code Section
25110).
b. Provides that, unless a person is otherwise exempt
from licensure as a broker-dealer, no person may effect
any transaction in, or induce or attempt to induce the
purchase or sale of any security in California, unless
that person has obtained a certificate from the
commissioner, authorizing that person to act in the
capacity of a broker-dealer. Further provides that no
person shall act on behalf of a licensed broker-dealer or
on behalf of a securities issuer, effect any transaction
in, or induce or attempt to induce the purchase or sale
of any security in this state, unless that broker-dealer
and agent have complied with rules adopted by the
commissioner for the qualification and employment of
those agents (Corporations Code Section 25210).
c. Provides that, unless a person is otherwise exempt
from licensure as an investment adviser, no person may
conduct business as an investment adviser in California,
unless that person has obtained a certificate from the
commissioner, authorizing that person to act in the
capacity of an investment adviser. Further provides that
no person shall act on behalf of a licensed investment
adviser, offer or negotiate for the sale of investment
advisory services; determine which recommendations shall
be made to, make recommendations to, or manage the
accounts of clients of the investment adviser; or
determine the reports or analyses concerning securities
to be published by an investment adviser, unless the
investment adviser and that person have complied with
rules adopted by the commissioner for the qualification
and employment of those persons (Corporations Code
Section 25230).
2. Provides for the Commodities Law of 1990 (Corporations
Code Section 29500 et seq.), which governs the sale or
purchase, or offer to sell or purchase any commodity under
any commodity contract or commodity option, by persons not
otherwise regulated as commodities traders under federal
law, or not otherwise exempt from regulation in that
capacity under state or federal law.
SB 538 (Hill), Page 4
COMMENTS
1. Purpose: SB 538 makes several changes to the state's
Corporate Securities Law of 1968, which are intended to
improve the state's ability to protect California investors.
The bill's provisions augment DOC's securities law
enforcement resources and streamline the process by which
DOC may collect judgments from securities licensees found to
have violated state securities laws. The bill also makes
other technical changes, intended to remove unnecessary
regulatory burdens on California limited partnerships and
limited liability partnerships, bring the state Commodities
Law into alignment with similar laws that DOC administers,
and make technical corrections.
2. Discussion: Each of the bill's major provisions is
discussed below.
a. Broker-dealer and investment adviser renewal fees:
Broker-dealers are persons (individuals or firms) that
buy and sell securities, either on behalf of customers,
or on behalf of themselves. People who work for
broker-dealers are called registered representatives or
agents. Broker-dealers and their agents generally earn
money by charging per transaction. Investment advisers,
whether companies or individuals, earn money by advising
customers about securities. Individuals who advise
customers on behalf of investment adviser firms are
called investment adviser representatives.
The law imposes a fiduciary duty on investment advisers in
their interactions with their clients, and requires
broker-dealers to evaluate the suitability of
investments, before they recommend those investments for
their clients.
California is home to approximately 3,100 licensed
broker-dealer firms, which employ approximately 285,000
agents, and to approximately 3,600 licensed investment
adviser firms, which employ just over 50,000
representatives.
Because of historic funding shortfalls, California does not
perform regular, periodic regulatory examinations of its
broker-dealers, their agents, or its investment advisers
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or their representatives. Because of resource
constraints, DOC gives priority to cases in which a
customer complains about the activities of a licensee, or
when another regulator notifies DOC that there may be a
problem involving a DOC licensee. The department is
unable to perform routine examinations as frequently as
it would like, to ensure licensee compliance with state
securities laws and discourage misconduct.
DOC seeks to examine its broker-dealer and investment
adviser licensees once every four years (the minimum
frequency with which DOC examines several of its other
licensees, and the minimum frequency with which a
majority of other states examine their broker-dealer and
investment adviser licensees). However, because it lacks
sufficient resources, DOC's actual broker-dealer and
investment adviser examination frequency is once every 28
years. Licensed broker-dealers and investment advisers
are reviewed once, upon their initial application for a
license, and often never again.
The Dodd-Frank Wall Street Reform and Consumer Protection
Act exacerbated DOC's inability to adequately review the
activities of its broker-dealers and investment adviser
licensees, by adding approximately 500 investment adviser
firms and several thousand investment adviser
representatives to DOC's licensee population. These new
licensees are large investment adviser firms, which were
previously regulated at the federal level, and whose
activities are exceedingly more complex than those of
DOC's pre-Dodd-Frank licensee population.
California is one of only two states in the country that
fails to impose renewal fees on our broker-dealer agents
and investment adviser representatives. SB 538
authorizes DOC to charge annual renewal fees of up to $35
per broker-dealer agent and investment adviser
representative. Given its current licensee population,
DOC estimates that it will need to charge $28 annually
per broker-dealer agent and investment-adviser
representative, to achieve a four-year examination
frequency. By comparison, Texas charges $275.
b. Authorizing DOC to Petition Superior Courts For
Judgments Following Administrative Actions: At present,
DOC is authorized to bring administrative actions against
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securities law licensees that have violated the law,
seeking administrative penalties and, if applicable,
ancillary relief, such as restitution, disgorgement, or
damages. Licensees, in turn, have full due process
rights under the Administrative Procedures Act, when they
are the subject of a DOC administrative action.
When DOC prevails at the administrative level, the
department sometimes encounters difficulties in
collecting on administrative judgments. At present, if a
licensee fails to comply with an administrative order,
DOC must re-try its case in superior court, if the
department wishes to obtain a judgment in the amount of
an administrative penalty or other ancillary relief that
was awarded via administrative action. This is not only
costly and time-consuming for the department; it also
imposes a burden on an already overburdened civil court
system.
To address this problem, SB 538 authorizes DOC to petition
an appropriate superior court to convert an
administrative order into a court judgment. SB 538
contains a finding that provision of a certified copy of
the commissioner's final decision to a court warrants the
issuance of a judgment and order by that superior court.
According to DOC, this provision will streamline the
process by which it can collect on administrative
judgments, without eliminating any rights of a licensee
to appeal an action (appeal rights authorized in
Government Code Section 11523 would continue to exist).
DOC has similar authority under three of the other laws it
administers (Deferred Deposit Transaction Law [Financial
Code Section 23058], Check Sellers, Bill Payers and
Proraters Law [Financial Code Section 12207], and the
Franchise Investment Law [Corporations Code Section
31406]). Similar language also appears in the Labor Code
(Section 5806) and Health and Safety Code (Section
25184.1).
c. Issuance of Desist and Refrain Orders: DOC
currently has the authority to issue D&Rs to persons
violating certain specific provisions of our securities
laws. However, DOC lacks broad authority to issue D&Rs
for any violation of the Corporate Securities Law of
1968. Because it lacks this broad authority, the
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department is unable to issue D&Rs for securities law
violations involving insider trading, aiding and
abetting, falsifying information, or for several other
bad acts that represent violations of state securities
laws. SB 538 grants DOC the broad D&R authority it
currently lacks.
d. Anti-Fraud Language: The anti-fraud language in
California's securities law has failed to keep up with
similar language in federal anti-fraud statutes. SB 538
updates our anti-fraud statutes to ensure consistency
with more comprehensive, federal anti-fraud statutes.
e. Service of Process: California limited partnerships
and limited liability partnerships are currently required
to file consents to service of process with the Secretary
of State. Existing state securities laws require these
entities to additionally file consents to service of
process with DOC, if these entities are applying to DOC
for qualification for the sale of securities, or if they
are filing a request for or notice of exemption from
qualification. SB 538 eliminates the duplicative filing
requirements, by deleting the requirement that these
entities file consents to service of process with DOC.
f. Period of Time To Challenge a Commodities Law D&R:
California's Commodities Law contains an out-of-date
provision that grants licensees and unlicensed persons
issued D&Rs under this law a full year in which to
challenge the issuance of a D&R. While no one disputes
the importance of allowing persons to challenge the
issuance of a D&R, granting a full year in which to do so
is inconsistent with the time periods for challenges that
exist in multiple other licensing laws. SB 538 changes
the one year time period in California's Commodities Law
to 30 days, and brings it in line with most of the other
laws administered by DOC.
3. Summary of Arguments in Support: Rationale for each of the
changes is summarized above. This bill's author also
states, "Broker-dealers, investment advisers, and their
employees perform critically important functions on behalf
of Californians, over which the state should provide an
appropriate level of oversight. Particularly in today's
extremely low interest rate environment, people are very
susceptible to aggressive sales pitches on risky investment
SB 538 (Hill), Page 8
products that promise high rates of investment return.
Investment advisers have a fiduciary duty to their clients,
and broker-dealers are required to ensure that the
investments they recommend to their customers are suitable
for those customers. Neither type of professional should be
pitching risky investment products to people for whom these
products are inappropriate. Yet, at the present time, DOC
lacks the resources necessary to ensure that the state's
investment professionals are following the law, and adhering
to their duties to investors.
The incremental cost to provide DOC with the examiners it needs
to conduct regular regulatory examinations of its securities
licensees is miniscule - in the range of $25 to $30
annually. We owe it to California investors to do what we
can to protect them in their dealings with those from whom
they seek advice related to their investments."
4. Summary of Arguments in Opposition: None received.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
None received
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102