BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     SB 726  


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          Date of Hearing:  August 3, 2016


                        ASSEMBLY COMMITTEE ON APPROPRIATIONS


                               Lorena Gonzalez, Chair


          SB 726  
          (Hueso) - As Amended June 30, 2016


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          |Policy       |Banking and Finance            |Vote:|9 - 1        |
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          Urgency:  No  State Mandated Local Program:  YesReimbursable:   
          No


          SUMMARY:


          This bill 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.


          FISCAL EFFECT:


          1)Significant one-time costs in excess of $1 million for DBO to  
            research and develop the scope of regulations related to short  








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            sales in the securities market. This research will include a  
            preliminary analysis identifying the core problems in the  
            securities market that should be addressed by state  
            regulation. (State Corporations Fund) 

          2)Ongoing costs to DBO of approximately $700,000 to regulate the  
            short sales market. (State Corporations Fund)

          COMMENTS:


          1)Purpose.  According to the author, SB 726 will put in motion a  
            process to modernize the California Corporate Securities Law.  
            The author's office notes that when that law was enacted in  
            1968, it did not envision the aggressive trading practices,  
            including short sales in certain conditions, and the  
            complexities that currently characterize modern financial  
            markets.  



          2)Recent amendments. The bill was amended in the Assembly  
            Committee on Banking and Finance to give DBO prerogative in  
            how it crafts a statewide policy related to short selling and  
            market manipulation. The prior version of this bill set up a  
            framework to prevent investors from knowingly or recklessly  
            making untrue statements to any California state government  
            official with the intention of inducing an investigation of a  
            publicly-traded company in order to manipulate the value of  
            that company's stock. 
          


          3)Short sales. A short sale is the sale of a stock that an  
            investor does not own. Short sellers typically borrow the  
            stock, sell the stock, and then buy back the stock to return  
            it to the lender. If the price of the stock drops, short  
            sellers buy the stock at the lower price and make a profit.









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            The vast majority of short sales are legal. The Securities and  
            Exchange Commission (SEC) notes that abusive short sales are  
            illegal and that it is against the law for anyone to engage in  
            a series of transactions in order to depress the price of a  
            stock for the purpose of inducing the purchase or sale of the  
            securities by others. Therefore, short sales that are done to  
            manipulate the price of a stock are prohibited. 





          4)Herbalife. The case of Herbalife is one of the most widely  
            publicized cases of a dispute between a company and a short  
            seller. In that case, investor William Ackman accused  
            Herbalife of predatory hiring practices while entering a $1  
            billion short against Herbalife's shares in 2012. The Federal  
            Trade Commission (FTC), in investigating both claims about  
            Herbalife's business practices as well as Ackman's actions,  
            failed to find enough evidence to bring criminal charges  
            against either the company or the investor.  



          5)The role of DBO.  As amended in policy committee, SB 726  
            requires DBO to adopt regulations related to market  
            manipulation by short sellers in the securities market.  
            However, it is unclear what type market manipulation DBO  
            should address that is not already against the law. As a  
            result, DBO would need to undergo extensive research and  
            analysis to identify core problems and the type of regulations  
            and oversight required to address those problems.   



          Analysis Prepared by:Luke Reidenbach / APPR. / (916)  
          319-2081








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