BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION Senator Isadore Hall, III Chair 2015 - 2016 Regular Bill No: SB 796 Hearing Date: 4/14/2015 ----------------------------------------------------------------- |Author: |Committee on Governmental Organization | |-----------+-----------------------------------------------------| |Version: |3/12/2015 | ----------------------------------------------------------------- ------------------------------------------------------------------ |Urgency: |No |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant:|Arthur Terzakis | | | | ----------------------------------------------------------------- SUBJECT: Alcoholic beverage licenses: private equity funds DIGEST: This bill creates an exception to the current requirement in the Alcoholic Beverage Control (ABC) Act that the Department of ABC must identify and potentially qualify any person or entity who is an investor in a private equity fund, as defined, that holds any interest in an alcoholic beverage license, subject to certain conditions. ANALYSIS: Existing law: 1)Establishes the Department of ABC and grants it exclusive authority to administer the provisions of the ABC Act in accordance with laws enacted by the Legislature. This involves licensing individuals and businesses associated with the manufacture, importation and sale of alcoholic beverages in this state and the collection of license fees for this purpose. 2)Requires the Department of ABC, upon receipt of an application for a license or for a transfer of a license and the applicable fee, to make a thorough investigation to determine whether the applicant and the premises for which a license is applied qualify for a license and whether the provisions of the ABC Act have been complied with. (B & P Code Section 23958) SB 796 (Committee on Governmental Organization) Page 2 of ? 3)Requires any corporation, limited partnership, or limited liability company holding a license to manufacture, distill, rectify, or sell alcoholic beverages to report any change in the ownership, management, or control of the entity to the Department of ABC. (B & P Code Sections 23405, 23405.1, and 23405.2) 4)Extends the reporting requirements referenced in item #3 above to any corporation, limited partnership, or limited liability company that holds, directly or indirectly, 10% or more of the ownership of a license to manufacture, distill, rectify, or sell alcoholic beverages. (B & P Code Section 23405.3) This bill: 1)Specifies that the Department of ABC is not required to qualify for a license a person who is an investor in a private equity fund, as defined, that holds an interest in an alcoholic beverage license, provided all of the following conditions are satisfied: a) The private equity fund's interest in the license is limited to a passive investment, so that neither the private equity fund nor any manager, employee, or agent of the private equity fund has any involvement in, or control over, the management of the licensed business or of the license. b) The private equity fund advisors are registered under the federal Investment Advisors Act of 1940, and are subject to, and comply with, specified federal investment advisor code of ethics regulations. c) An investor shall not, directly or indirectly, hold more than 10% interest in the private equity fund. d) An investor in the private equity fund shall not have any control, directly or indirectly, over the investment decisions of the private equity fund. 2)Defines "private equity fund" as an investment company that makes investments in equity or debt securities of another company that does not provide investors with redemption rights in the ordinary course. Also, makes it explicit that a SB 796 (Committee on Governmental Organization) Page 3 of ? private equity fund does not include a hedge fund, liquidity fund, real estate fund, securitized asset fund, or venture capital fund. 3)Authorizes the Department of ABC to require the manager of the private equity fund to execute an affidavit confirming compliance with the requirements of this new body of law. 4)Specifies that the provisions of this bill are not intended to allow a person, by reason of his/her investment in a private equity fund, to hold an interest in a license issued by the department if that interest is not otherwise permitted under the provisions of this bill. Background The enactment of the 21st Amendment to the U.S. Constitution in 1933 repealed the 18th Amendment and ended the era of Prohibition. Accordingly, states were granted the authority to establish alcoholic beverage laws and administrative structures to regulate the sale and distribution of alcoholic beverages. Currently, the Department of ABC is required to make a thorough investigation of all applicants for a license, which includes among many things, identifying all individuals who have an interest regardless of percentage interest. The department is also required to qualify and obtain fingerprints for all individuals who hold more than 10% or more interest in the license. The only exception to that qualification requirement is for publicly traded companies [B & P Code Section 23405 (c)]. This proposal would allow an exception to the current requirement in the ABC Act that the department must identify and potentially qualify any person or entity who is an investor in a private equity fund that holds any interest in an alcohol license. Private equity funds tend to be passive investments and often times the individual investors are not aware of specific investments made by the fund. Investors in private equity funds do not have day to day involvement or influence over the decisions and operations of the ABC licensed business. In turn, identifying and qualifying these investors has become a cumbersome and burdensome process for the department with no SB 796 (Committee on Governmental Organization) Page 4 of ? advancement of the original intent of the law. The department has heard anecdotal information that this onerous requirement discourages investors and unnecessarily prolongs the ABC licensing process. FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No SUPPORT: None received OPPOSITION: None received