BILL ANALYSIS Ó
SB 538
Page 1
Date of Hearing: June 10, 2013
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Roger Dickinson, Chair
SB 538 (Hill) - As Amended: April 1, 2013
SENATE VOTE : 27-6
SUBJECT : The Corporate Securities Law of 1968
SUMMARY : Makes various changes to the Corporate Securities Law of
1968 (Securities Law). Specifically, this bill :
1)Authorizes Department of Corporations (DOC) to charge annual
renewal fees of $35 per broker-dealer agent and investment
advisor representative.
2)Authorizes DOC commissioner to apply to the appropriate superior
court for a civil judgment of imposed penalties after the
exhaustion of administrative penalties for a violation of the
Securities Law.
3)Expands the types of violations for which DOC is authorized to
issue desist and refrain orders (D&R) under the Securities Law.
4)Ensures consistency with federal law by updating anti-fraud
provisions in the Securities law 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)Adds California limited partnership and California limited
liability companies to list of entities exempt from requirement
to file consents to service of process with DOC.
6)Changes the length time a licensee may challenge a D&R concerning
the Commodities Law to 30 days.
7)Makes legislative findings and declarations of the following:
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a) Regular, periodic regulatory examinations of broker-dealers
and investment advisers is critical to the protection of
consumers, many of whom rely on broker-dealers and investment
advisers for help in managing investments and in making sound
financial decisions.
b) The DOC lacks license fee revenue sufficient to perform
regular, periodic regulatory examinations of broker-dealers
and investment advisers at a frequency that would ensure high
levels of consumer protection.
c) It is the intent of the Legislature that revenue raised
through amendments made by this bill to Corporations Code
Sections 25608 and 25608.1 be used to perform regular,
periodic regulatory examinations of broker-dealer agency and
investment adviser representatives at least once every four
years, or more often, if deemed necessary for the protection
of the public by the Commissioner of Corporations.
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.
2)Specifies that it is unlawful for any person to offer 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).
3)States that, unless a person is otherwise exempt from licensure
as a broker-dealer, no person may affect 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).
4)Provides that, unless a person is otherwise exempt from licensure
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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).
5)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.
FISCAL EFFECT : According to the Senate Appropriations Committee
analysis, approximately $7.8 million - $9.8 million in new revenue
to the DOC. 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.
COMMENTS :
According to the author, "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 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
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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."
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.
Due to funding restraints broker-dealers, their agents, or
investment advisor are usually only reviewed when they file their
initial application. DOC seeks to conduct these examinations at
least once every 4 years but this often does not occur due to
funding restraints. The primary way in which DOC monitors this
licensee population is via complaints that arise from customers of
a licensee. Furthermore, Dodd-Frank Wall Street Reform and
Consumer Protection Act has added further stress to DOC by adding
approximately 500 investment adviser firms and several thousand
investment advisor representatives to DOC's licensee population.
California is one of a handful of states that do not currently
impose renewal fees on these entities, while other states like
Texas charge $275.
Authorizing DOC to Petition Superior Courts:
At present, DOC is authorized to bring administrative actions
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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 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.
SB 538 provides authority to DOC that is similar to 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).
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. SB 538 grants DOC the broad D&R
authority it currently lacks.
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.
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
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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.
Timeframe 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.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081