BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, 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
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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
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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
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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.
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