BILL ANALYSIS �
SB 538
Page 1
SENATE THIRD READING
SB 538 (Hill)
As Amended April 1, 2013
Majority vote
SENATE VOTE :27-6
BANKING & FINANCE 9-1 APPROPRIATIONS 13-0
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|Ayes:|Dickinson, Achadjian, |Ayes:|Gatto, Bocanegra, |
| |Blumenfield, Bonta, Chau, | |Bradford, |
| |Gatto, Linder, Perea, | |Ian Calderon, Campos, |
| |Weber | |Eggman, Gomez, Hall, |
| | | |Holden, Linder, Pan, |
| | | |Quirk, Weber |
|-----+--------------------------+-----+--------------------------|
|Nays:|Morrell | | |
| | | | |
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SUMMARY : Makes various changes to the Corporate Securities Law
of 1968 (Securities Law). Specifically, this bill :
1)Authorizes the Department of Business Oversight (DBO) to
charge annual renewal fees of $35 per broker-dealer agent and
investment advisor representative.
2)Authorizes DBO 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 DBO 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
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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 a list of entities exempt from
requirement to file consents to service of process with DBO.
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:
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 DBO 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 DBO (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
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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 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 Assembly Appropriations
Committee, assuming the DBO charges a renewal fee in the range
of $25 to $35, resulting in $7.5 million to $10 million in
special fund revenue to the DOB.
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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, DBO 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 DBO with the examiners it needs to
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
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investment advisor are usually only reviewed when they file
their initial application. DBO seeks to conduct these
examinations at least once every four years but this often does
not occur due to funding restraints. The primary way in which
DBO 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 DBO by adding approximately 500 investment adviser
firms and several thousand investment advisor representatives to
DBO'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 DBO to Petition Superior Courts : At present, DBO 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 DBO administrative action.
When DBO 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, DBO 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.
This bill provides authority to DBO 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 : DBO currently has the authority to
issue D&Rs to persons violating certain specific provisions of
our securities laws. However, DBO lacks broad authority to
issue D&Rs for any violation of the Corporate Securities Law of
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1968. This bill grants DBO 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. This bill 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 these entities to additionally
file consents to service of process with DBO, if these entities
are applying to DBO for qualification for the sale of
securities, or if they are filing a request for or notice of
exemption from qualification. This bill eliminates the
duplicative filing requirements, by deleting the requirement
that these entities file consents to service of process with
DBO.
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. This bill 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
DBO.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0002145