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
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          |Author:    |Committee on Governmental Organization               |
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          |Version:   |3/12/2015                                            |
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          |Urgency:   |No                     |Fiscal:      |Yes             |
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          |Consultant:|Arthur Terzakis                                      |
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          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)







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          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  








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            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  








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          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