BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Marty Block, Chair
2015 - 2016 Regular
Bill No: AB 1517 Hearing Date: June 17,
2015
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|Author: |Committee on Banking and Finance |
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|Version: |June 1, 2015 Amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Eileen Newhall |
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Subject: Business.
SUMMARY Makes changes intended to improve the ability of the
Department of Business Oversight (DBO) to administer the laws
under its jurisdiction.
DESCRIPTION
1. Makes technical changes to correct drafting errors, update
code sections, reflect the merger of the Department of
Financial Institutions (DFI) and Department of Corporations
(DOC) into DBO, and reflect the shifting of certain
responsibilities from the former DOC to the Department of
Managed Health Care (DMHC).
2. Returns the wording of the code section that prohibits
fraudulent marketing of securities to the way in which it
read prior to 2014, and, in doing so, provides that it is
unlawful for any person to offer or sell a security in
California, or to buy or offer to buy a security in
California, by means of any written or oral communication
that includes an untrue statement of a material fact or
omits to state a material fact necessary to make the
statements made, in the light of the circumstances under
which the statements were made, not misleading.
3. Clarifies that a person who is issued a desist and refrain
order under the California Commodity Law of 1990 has thirty
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days in which to request a hearing to contest that order.
4. Provides that, if a federal insurance agency accepts
appointment by the Commissioner of Business Oversight
(commissioner) as conservator, liquidator, or receiver of a
financial services licensee whose property and business have
been seized by the commissioner, that federal agency shall
have all of the powers conferred on the commissioner
pursuant to Chapter 7 of Division 1 of the Financial Code,
in addition to any powers conferred by applicable federal
law.
5. Deletes a code section limiting the amount of funds that
one bank or trust company may invest in another financial
institution other than a Federal Reserve Bank.
6. Modifies the definition of facility for purposes of the
Banking Law to provide that facility means an office at
which a bank engages in noncore banking business and does
not engage in core banking business.
7. Deletes the requirement that an industrial loan company
whose certificate has been surrendered or revoked submit a
closing audit report to the commissioner within 105 days
after the effective date of that surrender or revocation, as
specified.
EXISTING LAW
1. Contains several out-of-date references to DFI and DOC.
2. Provides that it is unlawful for any person, in connection
with the offer, sale, or purchase of a security, directly or
indirectly, to do any of the following: employ a device,
scheme, or artifice to defraud; 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; or engage in an
act, practice, or course of business that operates or would
operate as a fraud or deceit upon another person
(Corporations Code Section 25401).
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3. Includes two different and conflicting lengths of time in
which a person issued a desist and refrain order pursuant to
the California Commodity Law of 1990 has in which to appeal
that order (30 days and one year; Corporations Code Section
29542).
4. Provides that, if a DBO licensee whose property and
business have been taken by the commissioner is insured by a
federal insurance agency, the commissioner may tender to
that agency an appointment as conservator, liquidator, or
receiver of the licensee. Further provides that if the
federal agency accepts the appointment, it has the powers
conferred on the commissioner pursuant to Article 2 of
Chapter 7 of Division 1 of the Financial Code, in addition
to any powers conferred by applicable federal law.
5. Caps the amount of funds that a bank or trust company may
deposit in another financial institution other than a
Federal Reserve Bank, at 10% of the sum of shareholders'
equity, allowance for loan and lease losses, capital notes,
and debentures of the depositing bank or trust company,
unless the recipient financial institution has been
designated as a depository for the funds of the depositing
bank or trust company by a vote of the majority of the
directors of that bank or trust company, and unless the
financial institution has been approved by the commissioner
as a depository (Financial Code Section 1008).
6. Defines facility for purposes of the Banking Law as an
office in this state at which a bank engages in noncore
banking business and does not engage in core banking
business (Financial Code Section 1070).
7. Requires an industrial loan company whose certificate has
been surrendered or revoked to submit a closing audit report
to the commissioner on or before 105 days following the
effective date of the surrender or revocation, containing
audited financial statements for the twelve months ending
with the effective date of the surrender or revocation, or
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for such other period as the commissioner may specify
(Financial Code Section 18405).
COMMENTS
1. Purpose: AB 1517 is intended to improve DBO's ability to
administer the laws under its jurisdiction.
1. Background: This bill has six substantive provisions, each
of which is described below. Several of the provisions
correct inadvertent omissions and drafting errors contained
in prior bills.
Returns the Wording of the Code Section that Prohibits
Fraudulent Marketing of Securities to the Way in Which it
Read Prior to 2014: SB 538 (Hill), Chapter 335, Statutes of
2013, a bill whose language originated with DOC, amended
Corporations Code Section 25401. According to DBO, the
language of Section 25401 in SB 538 was intended to mirror
federal Securities and Exchange Commission Rule 10b-5.
"However, the amendments inadvertently raised the burden of
proof for civil and criminal litigation for Department
attorneys and local prosecutors who try such cases. There
is a substantial body of case law in California that may be
disrupted if Section 25401 of the Corporations Code remains
as is, potentially making enforcement and prosecution of
securities fraud more difficult. There is additional
concern that California courts will begin to rely on the
federal interpretation of Rule 10b-5, which requires that
plaintiffs prove scienter (i.e., that an offending party has
knowledge of the wrongness of an act prior to committing
it). This would provide less investor protections, since the
burden of proof would fall on them and their legal
representation." AB 1517 returns the wording of Section
25401 to the way in which it read prior to enactment of SB
538. DBO does not believe that language is needed to
clarify the way in which Section 25401 should be interpreted
during the period of time in which the changes enacted
pursuant to SB 538 were operative.
Amends the California Commodity Law of 1990 to Correct an
Inadvertent Drafting Error: Among its provisions, SB 538
(Hill), Chapter 335, Statutes of 2013, amended the
California Commodity Law of 1990 to specify that a person
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has 30 days, rather than one year, to request a hearing to
dispute a desist and refrain order issued pursuant to that
law. However, due to a drafting oversight, SB 538 failed to
delete all references to the one year timeframe. AB 1517
corrects the unintended drafting error and ensures that the
California Commodity Law of 1990 is consistent in referring
to 30 days as the period of time in which a persons served a
desist and refrain order under that law have in which to
request a hearing to appeal that order.
Deletes a Code Section That Was Previously Repealed, Then
Inadvertently Re-Added to the Financial Code: Financial
Code Section 1008 caps the amount of funds that one bank or
trust company may invest in another financial institution
other than a Federal Reserve Bank at 10%, except as
specified. According to DBO, Federal Reserve Board
Regulation F, which is applicable to all depository
institutions insured by the Federal Deposit Insurance
Corporation (FDIC), already sets limits on the amount of
funds that may be deposited by one institution into another
institution. DBO believes that Financial Code Section 1008
is unnecessary, because all financial institutions licensed
by DBO are subject to Federal Reserve Board Regulation F.
Furthermore, the code section that AB 1517 would repeal was
already repealed once before by the Legislature. The
language currently contained in Financial Code Section 1008
was repealed by AB 1301 (Gaines), Chapter 125, Statutes of
2008, then mistakenly reinserted by AB 1268 (Gaines),
Chapter 532, Statutes of 2010 and renumbered by SB 664
(Committee on Banking and Financial Institutions), Chapter
243, Statutes of 2011.
Amends the Definition of Facility Under the Banking Law : AB
1517 amends the definition of a facility to mean an office
(not 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. This change also corrects an
inadvertent drafting error resulting from the enactment of
AB 1301 (Gaines), Chapter 125, Statutes of 2008. Prior to
the enactment of AB 1301, state-chartered banks were able to
open offices outside of California under the supervision of
DFI. The inadvertent addition of the words "in this state"
by AB 1301 limited the establishment, relocation,
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designation, or discontinuance of a facility to offices and
branches in California. Striking "in this state" will
restore the authority of California state-chartered banks to
establish, relocate, designate, or discontinue facilities in
another state or country and the authority of DBO to
regulate those facilities.
Deletes the Requirement That an Industrial Loan Company Whose
Certificate Has Been Surrendered or Revoked Submit a Closing
Audit Report: According to DBO, the requirement that this
bill would delete is both unnecessary and seldom complied
with. The financial well-being of industrial loan companies
is already monitored by the commissioner through the
requirement that industrial loan companies submit quarterly,
unaudited financial statements and annual, audited financial
statements to the commissioner. Licensees that are in the
process of closing their business are reluctant to pay for
the final, audited financial statement required by existing
law, and many do not. When an industrial loan company fails
to submit its final, closing audit, the only recourse
available to the commissioner is to revoke the license of
that licensee. This threat means little to the companies,
as they are exiting the business line anyway, and it imposes
unnecessary costs on DBO.
Reinstates the Power of the Commissioner to Appoint the FDIC as
Conservator, Liquidator, or Receiver of a Bank Insured By
That Federal Agency: Prior to enactment of SB 664
(Committee on Banking and Financial Institutions), Chapter
243, Statutes of 2011, California law clearly stated that
the FDIC, as a conservator, liquidator, or receiver, was
granted all of the rights and powers of the commissioner
under Article 8, Liquidation and Conservation. However,
when SB 664 reorganized and renumbered several Financial
Code sections, the wording of Financial Code Section 620 was
not updated to reflect that reorganization. This had the
inadvertent effect of limiting the FDIC's powers when acting
as conservator, liquidator or receiver. AB 1517 corrects
this drafting error by replacing the reference to "this
article" with a reference to "this chapter," thus restoring
these powers to the FDIC.
1. Summary of Arguments in Support: None received.
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2. Summary of Arguments in Opposition: None received.
3. Prior and Related Legislation:
a. SB 538 (Hill), Chapter 335, Statutes of 2013: Made
changes intended to improve the ability of DBO to
administer the laws under its jurisdiction.
b. AB 1317 (Frazier), Chapter 352, Statutes of 2013 and
SB 820 (Committee on Governmental Organization), Chapter
353, Statutes of 2013: Updated numerous code sections to
reflect the merger of DFI and DOC into DBO, pursuant to
Government Reorganization Plan 2.
c. AB 1301 (Gaines), Chapter 125, Statutes of 2008; AB
2749 (Gaines), Chapter 501, Statutes of 2008; 1268
(Gaines), Chapter 532, Statutes of 2010; SB 664
(Committee on Banking and Financial Institutions),
Chapter 243, Statutes of 2011: The series of bills that
updated, modernized, and renumbered provisions of the
Financial Code administered by DFI.
d. AB 78 (Gallegos), Chapter 525, Statutes of 1999:
Established DMHC and transferred the healthcare programs
administered by DOC to DMHC.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
None received
Opposition
None received
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