BILL ANALYSIS Ó SB 726 Page 1 Date of Hearing: August 3, 2016 ASSEMBLY COMMITTEE ON APPROPRIATIONS Lorena Gonzalez, Chair SB 726 (Hueso) - As Amended June 30, 2016 ----------------------------------------------------------------- |Policy |Banking and Finance |Vote:|9 - 1 | |Committee: | | | | | | | | | | | | | | ----------------------------------------------------------------- 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 SB 726 Page 2 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. SB 726 Page 3 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 SB 726 Page 4