BILL ANALYSIS                                                                                                                                                                                                    Ó




                   Senate Appropriations Committee Fiscal Summary
                            Senator Kevin de León, Chair


          SB 538 (Hill) - Corporate Securities
          
          Amended: April 1, 2013          Policy Vote: B&FI 8-0
          Urgency: No                     Mandate: No
          Hearing Date: April 15, 2013                            
          Consultant: Maureen Ortiz       
          
          This bill does not meet the criteria for referral to the  
          Suspense File.
          
          
          Bill Summary:  SB 538 authorizes the Corporations Commissioner  
          to charge a renewal fee of up to a $35 to licensed broker-dealer  
          agents and investment adviser representatives, and streamlines  
          the process for the Commissioner to apply to the superior court  
          for a judgment from licensees who have been found to have  
          violated the securities laws.  SB 538 additionally makes  
          numerous technical changes to ease administration of the  
          Corporate Securities Law.

          Fiscal Impact: 

              Approximately $7.8 million - $9.8 million in new revenue to  
              the Department of Corporations (Special)

          The revenue estimate is based on the DOC charging a renewal fee  
          ranging from $28-$35 for agents and investment adviser  
          representatives, and is based on an assumption that between 15%  
          and 20% of the existing licensees will choose not to renew.

          Background:  The Department of Corporations currently licenses  
          approximately 3,100 licensed broker-dealer firms which employ  
          about 285,000 agents, and approximately 3,600 licensed  
          investment adviser firms which employ just over 50,000  
          representatives.  

          Because of historic funding shortfalls, the Department of  
          Corporations does not perform regular, periodic regulatory  
          examinations of its broker-dealers, their agents, or its  
          investment advisers or their representatives.  The department  
          assigns priority to cases in which a customer complains about  
          the activities of a licensee, or when another regulator notifies  








          SB 538 (Hill)
          Page 1



          DOC that there may be a problem involving a DOC licensee.  The  
          department would prefer 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.  

          At present, DOC is authorized to bring administrative actions  
          against 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 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.  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 requires the commissioner to  
          provide a certified copy of the final decision to a court and  
          provides that this will warrant 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  








          SB 538 (Hill)
          Page 2



          appears in the Labor Code (Section 5806) and Health and Safety  
          Code (Section 25184.1).  


          Proposed Law:  SB 538 does the following:

            
            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  
              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  








          SB 538 (Hill)
          Page 3



              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.


          Staff Comments:  California is one of only two states in the  
          country that does not currently impose renewal fees on  
          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.  

          Staff notes that approximately $18.5 million is currently on  
          loan from the Corporations Fund to the General Fund.  If these  
          funds were repaid in the near future, it would likely reduce the  
          amount of fee increase necessary to accomplish the 4 year cycle  
          audits.

           








          SB 538 (Hill)
          Page 4