BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 1517|
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THIRD READING
Bill No: AB 1517
Author: Committee on Banking and Finance
Amended: 6/1/15 in Senate
Vote: 21
SENATE BANKING & F.I. COMMITTEE: 7-0, 6/17/15
AYES: Block, Vidak, Galgiani, Hall, Hueso, Lara, Morrell
SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8
ASSEMBLY FLOOR: 78-0, 5/14/15 (Consent) - See last page for
vote
SUBJECT: Business
SOURCE: Author
DIGEST: This bill makes changes intended to improve the
ability of the Department of Business Oversight (DBO) to
administer the laws under its jurisdiction.
ANALYSIS:
Existing law:
1)Contains several out-of-date references to the Department of
Financial Institutions (DFI) and Department of Corporations
(DOC), both of which were dissolved in July, 2013 through
their merger into DBO.
2)Provides that it is unlawful for any person, in connection
with the offer, sale, or purchase of a security, directly or
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Page 2
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).
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 of Business Oversight
(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
(Financial Code Section 620).
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
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Page 3
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 for such
other period as the commissioner may specify (Financial Code
Section 18405).
This bill:
1)Makes technical changes to correct drafting errors, update
code sections, reflect the merger of DFI and 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 30 days
in which to request a hearing to contest that order.
4)Provides that, if a federal insurance agency accepts
appointment by the 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
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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.
Comments
AB 1517 is intended to improve DBO's ability to administer the
laws under its jurisdiction. 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
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inadvertent drafting error. Among its provisions, SB 538
amended the California Commodity Law of 1990 to specify that a
person 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 repeals 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. 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, designation, or
discontinuance of a facility to offices and branches in
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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
deletes 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, 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.
Related/Prior Legislation
SB 538 (Hill, Chapter 335, Statutes of 2013) made changes
intended to improve the ability of DBO to administer the laws
under its jurisdiction.
AB 1317 (Frazier, Chapter 352, Statutes of 2013) and SB 820
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(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.
AB 1301 (Gaines, Chapter 125, Statutes of 2008), AB 2749
(Gaines, Chapter 501, Statutes of 2008), AB 1268 (Gaines,
Chapter 532, Statutes of 2010), and SB 664 (Committee on Banking
and Financial Institutions, Chapter 243, Statutes of 2011)
updated, modernized, and renumbered provisions of the Financial
Code administered by DFI.
AB 78 (Gallegos, Chapter 525, Statutes of 1999) established DMHC
and transferred the healthcare programs administered by DOC to
DMHC.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: No
SUPPORT: (Verified6/29/15)
None received
OPPOSITION: (Verified6/29/15)
None received
ASSEMBLY FLOOR: 78-0, 5/14/15
AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom,
Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang,
Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle,
Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina
Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez,
Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden,
Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Lopez, Low,
Maienschein, Mathis, Mayes, McCarty, Melendez, Mullin,
Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea,
Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago,
Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber,
Wilk, Williams, Wood, Atkins
AB 1517
Page 8
NO VOTE RECORDED: Linder, Medina
Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102
6/30/15 13:53:43
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