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