BILL ANALYSIS Ó
AB 1517
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Date of Hearing: April 27, 2015
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
AB 1517
Committee on Banking and Finance - As Amended April 16, 2015
SUBJECT: Business
SUMMARY: Updates cross-references and outdated contact
information with respect to the Department of Business Oversight
(DBO). Specifically, this bill:
1)Transfers additional duties from the abolished Department of
Corporations (DOC) and the abolished Department of Financial
Institutions (DFI) to the DBO and the Commissioner of Business
Oversight, as specified.
2)Repeals obsolete provisions relating to the DOC.
3)Makes other clarifying and technical changes.
EXISTING LAW implements the Governor's Reorganization Plan,
which combined as of July 1, 2013, the DOC and the DFI to create
the DBO. DBO provides the regulation and oversight of state
chartered banks and credits unions and money transmitters.
Furthermore, DBO is charged with the regulation and oversight of
mortgage loan originators, deferred deposit transaction
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licensees, finance lenders, residential mortgage lenders, escrow
agents, securities broker-dealers, and investment advisors.
FISCAL EFFECT: Unknown.
COMMENTS:
AB 1517, an Assembly Banking and Finance Committee bill merely
updates and makes needed corrections throughout various code
sections.
The changes in the measure include:
1)In Financial Code 1070 (d): Amends the definition of
"facility. "Facility," means an office in this state at which
a bank engages in noncore banking business but at which it
does not engage in core banking business.
Under current law, a "facility" only refers to offices of a
bank within the state of California. This becomes an issue
when a bank wishes to establish a facility in another state or
country (foreign facility) or wishes to relocate, redesignate
or discontinue an existing foreign facility because current
law does not allow a bank to do so, and DBO has no authority
over existing foreign facilities.
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Prior to the enactment of AB 1301 (Gaines, Chapter 125,
Statutes of 2008) which defined "facility" in the Financial
Code, state-chartered banks were able to open offices outside
of the state under the supervision of DBO. The inadvertent
error in the definition limits the establishment, relocation,
redesignation or discontinuance of a facility to just offices
and branches in the state of California.
Striking out "in the state" would restore the authority of
California state-chartered banks to establish, relocate,
redesignate or discontinue facilities in another state or
country, and allow the DBO to regulate those facilities. This
would eliminate the constraints in current law that only
allows a California state-chartered bank to open a facility in
California.
2)Repeals Financial Code 1008. Financial Code 1008 restricts
the amount of funds a financial institution may deposit in any
other financial institution to 10 percent of capital unless
the institution has been approved by the commissioner.
Generally, well-known correspondent banks receive no limit.
Federal Reserve Board Regulation F (12 CFR 206), which is
applicable to all depository institutions insured by the
Federal Deposit Insurance Corporation (FDIC), also sets
limitations on the amount of funds that may be deposited in
another financial institution; but does so by requiring a
financial institution to adopt policies based upon prudential
standards that take into account credit, liquidity, and
operational risks. The Federal Reserve Board Regulation F
also monitors the correspondent to ensure that the bank's
exposure does not exceed internal limits set by the
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institution, or the regulation's maximum of 25 percent, unless
exempted.
The financial institutions licensed under the DBO are all
subject to Federal Reserve Board Regulation F, thus it is
unnecessary for DBO to reevaluate these transactions.
Additionally, the current language in Financial Code 1008 was
repealed by AB 1301 (Chapter 125, Statutes of 2008). It seems
that the language was mistakenly reinserted during the rewrite
of the Financial Code by AB 1268 (Gaines, Chapter 532,
Statutes of 2010) into Section 357. SB 664 (Committee on
Banking and Financial Institutions, Chapter 243, Statutes of
2011) renumbered the Sections and placed the language in
Section 1008.
3)Removal of subsection (b) in Financial Code 18405. Financial
Code 18405 (b) an industrial loan company whose certificate
has been surrendered or revoked shall, on or before 105 days
after the effective date of such surrender or revocation,
submit to the commissioner a closing audit report containing
audited financial statements as of such effective date for the
12 months ending with such effective date, or for such other
period as the commissioner may specify. Such report shall
include the information required by subdivision (a) of this
section and other relevant information specified by the
commissioner. A company which has complied with this
subdivision is exempted from the provisions of subdivision
(a).
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A premium finance agency is an agency that lends money to an
insured party to cover the cost of the premiums paid by
insurers. Under current law, a premium finance agency that is
surrendering its license must submit an audited financial
statement to the DBO as part of the surrender. Non-compliance
with this statute is high, since licensees are reluctant to
pay for an audited financial statement when they are in the
process of exiting the business. The only recourse for the
commissioner of DBO is to revoke the license and prepare for a
possible administrative hearing, which adds to DBO's
regulatory costs.
Currently, the DBO has 108 premium finance agency licensees.
Thirteen premium finance agency licensees are currently in the
process of surrendering their licenses. In some cases, the
premium finance agencies have ceased doing business. However,
the DBO is unable to purge the licensee from its rolls until
the audited financial statement is obtained. Failing that,
the DBO is required to revoke the license by issuing an order
and preparing for an administrative hearing (if requested by
the licensee).
4)Amendment to correct error in Corporations Code 25401.
Corporations Code 25401 states it is unlawful for any person,
in connection with the offer, sale, or purchase of a security,
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directly or indirectly, to do any of the following:
a) Employ a devise, scheme, or artifice to defraud.
b) Make an untrue statement of material fact or omit to
state a material fact necessary to make the statements
made, in light of the circumstances under which they were
made, not misleading.
c) Engage in an act, practice, or course of business that
operates or would operate as a fraud or deceit upon another
person.
It is unlawful for any person to offer or sell a security in
this state or buy or offer to buy a security in this state by
means of any written or oral communication which includes an
untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements made,
in the light of the circumstances under which they were made,
not misleading.
SB 538 (Hill, Chapter 335, Statutes of 2013) amended the
Corporations Code to align certain provisions with federal
law. However, one amendment inadvertently raised the burden
of proof for civil and criminal litigation for DBO attorneys
and local prosecutors who try securities fraud cases. There
is additional concern that California courts will begin to
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rely on the federal interpretation of Rule 10b-5, which
requires that plaintiffs prove they relied upon any
misrepresentations or omissions made by the defendants. This
would provide less protection to consumers since the burden of
proof would fall on them and their legal representation.
The DBO Enforcement Division has received input from district
attorneys that their prosecutors will be negatively impacted
if current law in Section 25401 under the Corporations Code
remains in place.
The amendment to return to the former wording of Corporations
Code Section 25401 in its entirety will return the burden of
proof for securities fraud back to its status under
long-settled California law for cases involving
misrepresentations or omissions of material fact.
5)Amendment to correct the timeframe in which an individual may
request a hearing to dispute a desist and refrain order under
Corporations Code 29542 (b). Corporations Code 29542 (b)
states if after an order has been made under subdivision (a),
a request for hearing is filed in writing within one year to
30 days of the date of service of the order by the person to
whom the order was directed, a hearing shall be held in
accordance with the Administrative Procedure Act (Chapter 5,
(commencing with Section 11500) of Part 1 of Division 3 of
Title 2 of the Government Code), and the commissioner shall
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have all of the powers granted under the Administrative
Procedure Act. Unless the hearing is commenced within 15
business days after the request is filed (or the person
affected consents to a later date), the order is rescinded.
If that person fails to file a written request for a hearing
within 30 days from the date of service of the order, the
order shall be deemed a final order of the commissioner and
shall not be subject to review by any court or agency,
notwithstanding Section 29563.
SB 538 amended the California Commodity Law of 1990 to specify
the period in which an individual may request a hearing to
dispute a desist and refrain order. This bill changed the time
period from one year to 30 days in the Corporations Code
section 29542(b), however, due to an oversight, there still
remains a reference to the one year timeframe.
6)Technical clean-up amendments:changes references to the DOC
and DFI to the DBO. Update the powers and responsibilities of
DOC, DFI and their respective commissioners to the newly
created DBO.
During the Governor's Reorganization Plan 2 (GRP 2) many laws
were updated to reflect the newly created departments. AB
1317 (Frazier, Chapter 352, Statutes of 2013) and SB 820
(Committee on Gov. Org, Chapter 353, Statutes of 2013)
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executed many of the necessary changes to implement GRP 2, but
did not address all of the necessary conforming changes to
properly reflect the agencies and departments created as a
result. In consequence the law currently still refers to DFI
and the DOC, which were eliminated under GRP 2.
REGISTERED SUPPORT / OPPOSITION:
Support
None on file.
Opposition
None on file.
Analysis Prepared by:Kathleen O'Malley / B. & F. / (916)
319-3081
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