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
SB 726
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