BILL ANALYSIS Ó
SB 726
Page 1
Date of Hearing: June 27, 2016
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
SB
726 (Hueso) - As Amended June 8, 2016
AS PROPOSED TO BE AMENDED
SENATE VOTE: 35-0 (vote not relevant)
SUBJECT: Corporate securities: unlawful conduct
SUMMARY: Requires the Commissioner of the Department of
Business Oversight (DBO) to adopt regulations that prohibit
fraudulent and manipulative practices by persons undertaking
short sales in the securities market.
EXISTING LAW:
1)Provides that it is unlawful for any person to offer or sell a
security in this state, or to buy or offer to buy a security
in this state, 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. [Corporations Code,
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Section 25401]
2)Provides that it is unlawful for any person to knowingly
alter, destroy, mutilate, conceal, cover up, falsify, or make
a false entry in any record, document, or tangible object with
the intent to impede, obstruct, or influence the
administration or enforcement of this division. [Corporations
Code, 25404 (a)]
3)Provides that it is unlawful for any person to knowingly make
an untrue statement to the commissioner during the course of
licensing, investigation, or examination, with the intent to
impede, obstruct, or influence the administration or
enforcement of any provision of this division. [Corporations
Code, Section 25404 (b)]
4)States that every person who with knowledge directly or
indirectly controls and induces any person to violate any
provision of this division or any rule or order thereunder
shall be deemed to be in violation of that provision, rule, or
order to the same extent as the controlled and induced person.
[Corporations Code, Section 25403 (a)]
5)Any person that knowingly provides substantial assistance to
another person in violation of any provision of this division
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or any rule or order thereunder shall be deemed to be in
violation of that provision, rule, or order to the same extent
as the person to whom the assistance was provided.
[Corporations Code, Section 25403 (b)]
6)It shall be unlawful for any person directly or indirectly to
do any act or thing which would be unlawful for that person to
do under any provision of this division or any rule or order
thereunder through or by any other person. [Corporations Code,
Section 25403 (c)]
7)Provides that nothing in this section shall be construed to
limit the power of the state to punish any person for any
conduct which constitutes a crime under any other statute.
[Corporations Code, Section 25403 (d)]
FISCAL EFFECT: Unknown.
COMMENTS:
SB 726, as proposed to be amended, will require the Commissioner
of DBO to establish regulations to prohibit fraudulent and
manipulative practices by persons undertaking short sales in the
securities market. While the suggested amendments are an
improvement from the previous version of the bill, a number of
questions and concerns remain.
Short-Selling
SB 726
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According to the Securities and Exchange Commission (SEC):
"A short sale is generally the sale of a stock you do
not own (or that you will borrow for delivery). Short
sellers believe the price of the stock will fall, or
are seeking to hedge against potential price
volatility in securities that they own.
If the price of the stock drops, short sellers buy the
stock at the lower price and make a profit. If the
price of the stock rises, short sellers will incur a
loss. Short selling is used for many purposes,
including to profit from an expected downward price
movement, to provide liquidity in response to
unanticipated buyer demand, or to hedge the risk of a
long position in the same security or a related
security."
Are short-sales legal? According to the SEC,
"Although the vast majority of short sales are
legal, abusive short sale practices are illegal.
For example, it is prohibited for any person to
engage in a series of transactions in order to
create actual or apparent active trading in a
security or to depress the price of a security
for the purpose of inducing the purchase or sale
of the security by others. Thus, short sales
effected to manipulate the price of a stock are
prohibited."
Herbalife vs. Ackman
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This measure is a response to "short-selling" activities that
occurred surrounding the company Herbalife and an investor. For
more information on this please read this article:
http://www.wsj.com/articles/probes-of-ackman-and-herbalife-fizzle
-1454111460
Questions & Concerns:
1)It is unclear what "short sales" means as it is not defined in
the bill or existing law.
2)It is unclear what "securities market" means as it is not
defined in the bill or existing law.
3)It is unclear what problem exists in California that the bill
is trying to address. Is this a statewide issue or an issue
that should be addressed nationally?
REGISTERED SUPPORT / OPPOSITION:
Support
Bell Gardens Chamber of Commerce
California - Nevada Conference of Operating Engineers
SB 726
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California Legislative Conference of the Plumbing, Heating and
Piping Industry
California State Council of Laborers
Herbalife Nutrition
International Brotherhood of Electrical Workers Local Union 569
San Diego
Los Angeles Area Chamber of Commerce
National Electrical Contractors Association
Regional Hispanic Chamber of Commerce
Regional Hispanic Institute
Reinforcing Ironworkers Local #416
San Gabriel Valley Economic Partnership
San Gabriel Valley Regional Chamber of Commerce
South Gate Chamber of Commerce
State Building and Construction Trades Council, AFL-CIO
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The Greater Huntington Park Area Chamber of Commerce
The Latino Coalition (TLC)
Opposition
California Teamsters Public Affairs Council
Consumer Watchdog
UNITE-HERE
Analysis Prepared by:Kathleen O'Malley / B. & F. / (916)
319-3081