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