BILL NUMBER: AB 1688 CHAPTERED 09/23/99 CHAPTER 470 FILED WITH SECRETARY OF STATE SEPTEMBER 23, 1999 APPROVED BY GOVERNOR SEPTEMBER 23, 1999 PASSED THE ASSEMBLY SEPTEMBER 7, 1999 PASSED THE SENATE SEPTEMBER 2, 1999 AMENDED IN SENATE AUGUST 31, 1999 AMENDED IN SENATE AUGUST 16, 1999 INTRODUCED BY Assembly Member Papan MARCH 18, 1999 An act to amend Sections 1300 and 25219 of the Corporations Code, to amend Section 45308.5 of the Government Code, to amend Section 1170.3 of the Harbors and Navigation Code, to amend Sections 1792.2 and 25112.5 of the Health and Safety Code, and to amend Sections 1192.8 and 11521.2 of the Insurance Code, relating to securities. LEGISLATIVE COUNSEL'S DIGEST AB 1688, Papan. Securities. Existing law regulates the ownership and sale of, and investment in, securities registered on a national security exchange, as provided by federal law. The bill would incorporate and make applicable to securities listed on the National Market System of the NASDAQ Stock Market various provisions of state law relating to the following: the purchase of dissenting shares in connection with a corporate reorganization; the suspension of over-the-counter trading by agents and broker-dealers; a conflict of interest code for pilots involving the ownership of tugboats; the composition of reserves required to be maintained by entities executing or assuming continuing care contracts; the submission of disclosure statements by hazardous waste control applicants; authorized excess funds investments for domestic life insurers; and authorized investments by certain governmental retirement systems in common and preferred stock, as specified. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 1300 of the Corporations Code is amended to read: 1300. (a) If the approval of the outstanding shares (Section 152) of a corporation is required for a reorganization under subdivisions (a) and (b) or subdivision (e) or (f) of Section 1201, each shareholder of the corporation entitled to vote on the transaction and each shareholder of a subsidiary corporation in a short-form merger may, by complying with this chapter, require the corporation in which the shareholder holds shares to purchase for cash at their fair market value the shares owned by the shareholder which are dissenting shares as defined in subdivision (b). The fair market value shall be determined as of the day before the first announcement of the terms of the proposed reorganization or short-form merger, excluding any appreciation or depreciation in consequence of the proposed action, but adjusted for any stock split, reverse stock split, or share dividend which becomes effective thereafter. (b) As used in this chapter, "dissenting shares" means shares which come within all of the following descriptions: (1) Which were not immediately prior to the reorganization or short-form merger either (A) listed on any national securities exchange certified by the Commissioner of Corporations under subdivision (o) of Section 25100 or (B) listed on the National Market System of the NASDAQ Stock Market, and the notice of meeting of shareholders to act upon the reorganization summarizes this section and Sections 1301, 1302, 1303 and 1304; provided, however, that this provision does not apply to any shares with respect to which there exists any restriction on transfer imposed by the corporation or by any law or regulation; and provided, further, that this provision does not apply to any class of shares described in subparagraph (A) or (B) if demands for payment are filed with respect to 5 percent or more of the outstanding shares of that class. (2) Which were outstanding on the date for the determination of shareholders entitled to vote on the reorganization and (A) were not voted in favor of the reorganization or, (B) if described in subparagraph (A) or (B) of paragraph (1) (without regard to the provisos in that paragraph), were voted against the reorganization, or which were held of record on the effective date of a short-form merger; provided, however, that subparagraph (A) rather than subparagraph (B) of this paragraph applies in any case where the approval required by Section 1201 is sought by written consent rather than at a meeting. (3) Which the dissenting shareholder has demanded that the corporation purchase at their fair market value, in accordance with Section 1301. (4) Which the dissenting shareholder has submitted for endorsement, in accordance with Section 1302. (c) As used in this chapter, "dissenting shareholder" means the recordholder of dissenting shares and includes a transferee of record. SEC. 2. Section 25219 of the Corporations Code is amended to read: 25219. Notwithstanding any other provision of this division, if in his or her opinion the public interest and the protection of investors so require, the commissioner is authorized summarily to suspend all over-the-counter trading in this state by broker-dealers and agents in any security or summarily to suspend all trading on a national securities exchange located in this state in any security (provided, in the case of trading on that exchange, that the security is not listed on the National Market System of the NASDAQ Stock Market or any national securities exchange located outside this state on which trading has not been suspended) for a period not exceeding 90 days, and for successive periods of 90 days. No broker-dealer or agent shall effect any transaction (other than an unsolicited brokerage transaction effected on the National Market System of the NASDAQ Stock Market or on a national securities exchange located outside this state) in, or induce or attempt to induce the purchase or sale of, any security in this state in which trading is in any manner suspended under this section, except in performance of a contract previously entered into. SEC. 3. Section 45308.5 of the Government Code is amended to read: 45308.5. Notwithstanding Section 45308.1, in addition to any other investments as are authorized by this article, city retirement systems may in their discretion under the advice of proper counsel invest the assets of the retirement fund in an amount, determined on the basis of cost, not to exceed 10 percent of the assets in the first two years after the effective date of this section, not to exceed 15 percent during the third year after the effective date of this section, and not to exceed 25 percent thereafter, in common stock or shares, and not to exceed 2 percent of the assets in the first year after the effective date of this section, not to exceed 3 percent during the second year after the effective date of this section, and not to exceed 5 percent thereafter, in preferred stock or shares, of corporations created or existing under the laws of the United States, or any state, district, or territory thereof; provided that (a) The stock is registered on a national securities exchange, as provided in the "Securities Exchange Act of 1934" as amended, or is listed on the National Market System of the NASDAQ Stock Market. The registration shall not be required with respect to the following stocks: (1) The common stock of a bank which is a member of the Federal Deposit Insurance Corporation and has capital funds, represented by capital, surplus, and undivided profits, of at least fifty million dollars ($50,000,000); (2) The common stock of an insurance company which has capital funds, represented by capital, special surplus funds, and unassigned surplus, of at least fifty million dollars ($50,000,000); (3) Any preferred stock. (b) The corporation has total assets of at least one hundred million dollars ($100,000,000); (c) Bonds of that corporation, if any are outstanding, qualify for investment of the retirement fund, and that there are no arrears of dividend payments on its preferred stock; (d) The corporation has paid a cash dividend on its common stock in at least 8 of the 10 years next preceding the date of investment, and the aggregate net earnings available for dividends on the common stock of the corporation for the whole of that period have been equal to the amount of the dividends paid, and the corporation has paid an earned cash dividend in each of the last three years; (e) The investment in any one company may not exceed 5 percent of the common shares outstanding; and (f) No single common stock investment, based on cost, may exceed 2 percent of the assets of the fund. SEC. 4. Section 1170.3 of the Harbors and Navigation Code is amended to read: 1170.3. (a) The board shall adopt, by regulation, a pilot's conflict-of-interest code which shall include, but not be limited to, a provision specifying that a pilot shall not have any interest in, or derive any income from, any tugboat in operation on the Bays of San Francisco, San Pablo, and Suisun. This requirement of divestiture does not apply to the ownership of barges and vessels similar to barges. (b) The conflict-of-interest code shall not prohibit the ownership of stock in any corporation registered on a national securities exchange or on the National Market System of the NASDAQ Stock Market, pursuant to Section 78f of Title 15 of the United States Code, which may own tugboats in operation on the Bays of San Francisco, San Pablo, and Suisun. SEC. 5. Section 1792.2 of the Health and Safety Code is amended to read: 1792.2. (a) Any entity that has executed or assumed continuing care contracts shall maintain reserves covering obligations thereunder. (b) The following assumptions shall be used when calculating the reserves: (1) The following life expectancy table shall be used in connection with all continuing care contracts: Age Females Males Age Females Males 55 26.323 23.635 83 7.952 6.269 56 25.526 22.863 84 7.438 5.854 57 24.740 22.101 85 6.956 5.475 58 23.964 21.350 86 6.494 5.124 59 23.199 20.609 87 6.054 4.806 60 22.446 19.880 88 5.613 4.513 61 21.703 19.163 89 5.200 4.236 62 20.972 18.457 90 4.838 3.957 63 20.253 17.764 91 4.501 3.670 64 19.545 17.083 92 4.175 3.388 65 18.849 16.414 93 3.862 3.129 66 18.165 15.759 94 3.579 2.903 67 17.493 15.116 95 3.329 2.705 68 16.832 14.486 96 3.109 2.533 69 16.182 13.869 97 2.914 2.384 70 15.553 13.268 98 2.741 2.254 71 14.965 12.676 99 2.584 2.137 72 14.367 12.073 100 2.433 2.026 73 13.761 11.445 101 2.289 1.919 74 13.189 10.830 102 2.152 1.818 75 12.607 10.243 103 2.022 1.723 76 12.011 9.673 104 1.899 1.637 77 11.394 9.139 105 1.784 1.563 78 10.779 8.641 106 1.679 1.510 79 10.184 8.159 107 1.588 1.500 80 9.620 7.672 108 1.522 1.500 81 9.060 7.188 109 1.500 1.500 82 8.501 6.719 110 1.500 1.500 The life expectancy table set forth in this paragraph shall be used until this section is amended. (2) For residents over 110 years of age use 1.500 for computing the statutory reserve requirements. (3) If a continuing care retirement community has contracted with a resident under 55 years of age, provide the department with the methodology used to determine that resident's life expectancy. (4) A zero interest assumption shall be used to adjust resident life expectancies in conjunction with the computation of the statutory reserve requirement. (c) The reserves shall be calculated by progressing through each of the following steps: (1) Compute net cash per capita costs: (A) Cash operating expenses: Deduct: depreciation and other noncash expenses; processing fees; community services; expenses that will not be incurred in future years; reimbursements for services to nonresidents; donated services, if included as an operating expense on the income statement; investment income; contributions received; and other items that the continuing care retirement community reasonably believes should be deducted with accompanying explanation. For a continuing care retirement community in its first year of operation or following a major addition to an existing continuing care retirement community, cash operating expenses for calculating reserve requirements may be classified as fixed or variable and totaled separately. (B) Mean number of residents by level of care: List the number of residents for each level of care separately at the beginning of the fiscal year. Add the number of residents for each level of care separately at the end of the fiscal year. Divide the total for each level of care by two. (C) Total mean number of residents: Add the total number of residents at the beginning of the fiscal year to the total number of residents at the end of the fiscal year and divide by two. For continuing care retirement communities wherein resident population fluctuates significantly from month to month and for continuing care retirement communities in their first year of operation, the mean number of residents by level of care or the total mean number may be computed by adding the number of residents at the end of each month in the fiscal year and dividing by the total number of months included. The daily attendance for the fiscal year may also be used to determine the mean number of residents. (D) Net cash per capita cost: Cash operating expenses divided by the mean number of residents. It is acceptable, but not required, to compute net cash per capita for various levels of care, based on allocated expenses and contributions from consolidated financial statements. Allocation methods shall be subject to the approval of the department, and schedules shall be prepared for all levels of care, including any levels not covered by continuing care contracts. For a continuing care retirement community in its first year of operation or following a major addition to an existing continuing care retirement community, net cash per capita cost for calculating reserve requirements may be the sum of the figures determined by dividing fixed cash operating expenses by the number of residents at the end of the fiscal year, and dividing variable cash operating expenses by the mean number of residents. (2) Compute projected life cost: (A) Compute aggregate life expectancies: For each resident, compare age against the life expectancy table and total all life expectancies. (B) Multiply net cash per capita costs by aggregate life expectancies. (3) Compute five-year plan residents: Determine the maximum annual total of SSI/SSP payments for the year of entry for each resident. If that amount is greater than the amount of the entrance fee paid by a resident, the resident is designated a "Five-year Plan Resident" and the entrance fee is amortized over five years. No reserves are required for these residents after the fifth year. (4) Compute projected life revenue: (A) Annual fee: Multiply by 12 each monthly fee paid by residents, including payments to be made by third-party payers on behalf of the resident, including SSI/SSP and Medi-Cal, and contributions, donations, or endowments, that the provider actually used for operating expenditures for continuing care contracts during the fiscal year. (B) Continuing care residents requiring full reserves: Enter the number of continuing care residents for each annual fee, excluding five-year plan residents. (C) Aggregate life expectancies: For each resident, compare age against the life expectancy table and total all life expectancies for each annual fee. (D) Total projected life revenue: Multiply each annual fee by aggregate life expectancies. Total the products obtained. (5) Compute statutory reserve: (A) Reserves not including five-year plan residents: Deduct the projected life revenue from the projected life cost. If the remainder is less than zero, use zero. (B) Total statutory reserves: Add the total unamortized balance for five-year plan residents to the remainder in paragraph (A) above. (6) Compute liquid asset portion of statutory reserve: For providers that have executed monthly fee contracts with at least one-half of the residents, compute 5 percent of the total statutory reserves. For providers that have executed prepaid contracts with at least one-half of the residents, compute 25 percent of the total statutory reserves. (d) At least 25 percent of the statutory reserve shall consist of liquid assets, as defined in paragraph (8) of subdivision (e), except that a 5 percent requirement shall apply to the continuing care retirement communities that have executed monthly fee contracts with at least 50 percent of the residents. (e) The assets available for reserves shall consist of the following: (1) Deposits in commercial and savings accounts with California banks that are members of the Federal Deposit Insurance Corporation. (2) Notes receivable by the continuing care retirement community, that are secured by first deeds of trust and first mortgages on property not owned by the provider or its affiliates. (3) Stocks, bonds, and securities, at current market value unless otherwise specified, shall meet the following criteria to be approved as assets available for statutory reserves: (A) Highly liquid money securities, including, but not limited to, United States Treasury Bills, prime banker's acceptances, negotiable time certificates of deposit, and short-term tax-exempt notes. (B) Common stocks rated "above average" or higher by any national rating agency. For example, a rating of A+, A, or A- by Standard and Poor's Corporation is required for common stock. (C) Bonds issued by the United States government or federal agencies. (D) Nonfederal bonds that have a current rating of at least "A" by Moody's Investors Service, Standard and Poor's Corporation, or Fitch Investors Service, and are listed on a national securities exchange or on the National Market System of the NASDAQ Stock Market. (E) Bonds that are not listed on a national securities exchange or on the National Market System of the NASDAQ Stock Market, but are traded over-the-counter and have a current rating of at least "Aa" by Moody's Investors Service or at least "AA" by Standard and Poor's Corporation or Fitch's Investors Service. (F) The security interest in the cash surrender value of life insurance policies assigned by residents to the continuing care retirement community. (4) Stocks, bonds, and securities that do not meet the approval criteria may be retained as part of the reserves with the specific approval of the department. If necessary to meet reserve requirements, stocks, bonds, and securities that are not approved by the department may be disposed of in a gradual manner, to avoid loss to certificate holders. (5) Real estate used to provide care and housing for holders of continuing care contracts, or real estate, or equities therein, owned by the entity as an investment, the rents from which are used to discharge obligations to holders of continuing care contracts or to reinvest as a part of the reserves. These investments may be located outside the State of California. (A) The value of this real estate shall be based on 70 percent of the net equity thereof, which shall be the book value, assessed value, or current appraised value within 12 months prior to the end of the fiscal year, less all encumbrances, depreciation, and the amount required for reserves for refundable contracts under Section 1793, all according to audited financial statements acceptable to the department. (B) All appraisals shall be prepared by either a member of the American Institute of Appraisers or a member of the Society of Real Estate Appraisers, or the county assessor. The department may require technical reports to be verified or certified, or both. The expense of any technical reports or any verifications thereof shall be borne by the provider. (6) Seventy percent of the net equity in furniture and equipment situated on property used to provide care and housing for holders of continuing care contracts. (7) Investment certificates or shares in open end investment trusts, that meet all of the following requirements: (A) The trust management shall have experience either managing another mutual fund registered under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1 et seq.), or have been registered as an investment adviser under the Investment Advisors Act of 1940 (15 U.S.C. Sec. 80b-1 et seq.), and in either case shall currently have at least one hundred million dollars ($100,000,000) under its supervision. (B) Qualified for sale in California. (C) Has at least 40 percent of its directors or trustees not affiliated with the fund's management company or principal underwriter or any of their affiliates. (D) Is registered under the Investment Company Act of 1940. (E) Is a fund listed as qualifying under rules maintained by the Commissioner of Corporations in cooperation with the Department of Insurance. (8) Liquid assets, if any, shall consist of the following: (A) Listed bonds, stocks, and commercial and savings accounts. (B) A sinking fund comprised of liquid assets, if it is a replacement fund subject to disbursement for items, including, but not limited to, payment of principal and interest on the mortgage or for operations during the succeeding year. Replacement funds, that may only be used for capital improvements or repairs, shall not be included in liquid reserves. (9) Deposits made prior to signing a continuing care contract represent liabilities and shall be offset against liquid assets, if any, otherwise against any other assets. (10) Deposits that represent funds turned over to the continuing care retirement community by residents for safekeeping without relinquishing control thereof shall be offset against liquid assets, if any, otherwise against other assets. SEC. 6. Section 25112.5 of the Health and Safety Code is amended to read: 25112.5. "Disclosure statement" means either of the following: (a) A statement submitted to the department by an applicant, signed by the applicant under penalty of perjury, which includes all of the following information: (1) The full name, business address, social security number, and driver's license number of all of the following: (A) The applicant. (B) Any officers, directors, or partners, if the applicant is a business concern. (C) All persons or any officers, partners, or any directors if there are no officers, of business concerns holding more than 5 percent of the equity in, or debt liability of the applicant, except that if the debt liability is held by a lending institution, the applicant shall only supply the name and address of the lending institution. (2) The following persons listed on the disclosure statement shall submit properly completed fingerprint cards: (A) The sole proprietor. (B) The partners. (C) Other persons listed in subparagraph (C) of paragraph (1) and any officers or directors of the applicant company as required by the department. (3) Fingerprint cards submitted for any person required by paragraph (2) shall only be submitted once. Fingerprint cards shall be completed and submitted for any additional person only if there is a change in the person serving in a position for which fingerprint cards are required to be submitted pursuant to paragraph (2). The department shall use the information required by paragraph (2) to positively identify the applicant. (4) The full name and business address of any company which generates, transports, treats, stores, recycles, disposes of, or handles hazardous waste and hazardous materials in which the applicant holds at least a 5 percent debt liability or equity interest. (5) A description of any local, state, or federal licenses, permits, or registrations for the generation, transportation, treatment, storage, recycling, disposal, or handling of hazardous waste or hazardous materials applied for, or possessed by the applicant, or by the applicant under any previous name or names, in the three years preceding the filing of the statement, or, if the applicant is a business concern, by the officers, directors, or partners of the business concern, including the name and address of the issuing agency. (6) A listing and explanation of any final administrative orders or license revocations or suspensions issued or initiated by any local, state, or federal authority, in the three years immediately preceding the filing of the statement, or any civil or criminal prosecutions filed in the three years immediately preceding, or pending at the time of, the filing of the statement, with any remedial actions or resolutions if applicable, relating to the generation, transportation, treatment, storage, recycling, disposal, or handling of hazardous waste or hazardous materials by the applicant, or by the applicant under any previous name or names, or, if the applicant is a business concern, by any officer, director, or partner of the business concern. (7) A listing of any agencies outside of the state which regulate, or had regulated, the applicant's, or the applicant's under any previous name or names, generation, transportation, treatment, storage, recycling, disposal, or handling of hazardous waste or hazardous materials in the three years preceding the filing of the disclosure statement. (8) A listing and explanation of any federal or state conviction, judgment, or settlement, in the three years immediately preceding the filing of the statement, with any remedial actions or resolutions if applicable, relating to the generation, transportation, treatment, storage, recycling, disposal, or handling of hazardous waste or hazardous materials by the applicant, or by the applicant under any previous name or names, or if the applicant is a business concern, by any officer, director, or partner of the business concern. (9) A listing of all owners, officers, directors, trustees, and partners of the applicant who have owned, or been an officer, director, trustee, or partner of, any company which generated, transported, treated, stored, recycled, disposed of, or handled hazardous wastes or hazardous materials and which was the subject of any of the actions described in paragraphs (6) and (8) for the three years preceding the filing of the statement. (b) In lieu of the statement specified in subdivision (a), a corporation, the stock of which is listed on a national securities exchange or on the National Market System of the NASDAQ Stock Market and registered under the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78a et seq.), or a subsidiary of that corporation, may submit to the department copies of all periodic reports, including, but not limited to, those reports required by Section 78m of Title 15 of the United States Code and Part 229 (commencing with Section 229.10) of Chapter II of Title 17 of the Code of Federal Regulations which the corporation or subsidiary has filed with the Securities and Exchange Commission in the three years immediately preceding the submittal, if the corporation or subsidiary thereof has held a hazardous waste facility permit or operated a hazardous waste facility under interim status pursuant to Section 25200 or 25200.5 since January 1, 1984. SEC. 7. Section 1192.8 of the Insurance Code is amended to read: 1192.8. (a) A domestic life insurer having admitted assets aggregating in value not less than one hundred million dollars ($100,000,000) may make excess fund investments pursuant to this section in interest-bearing notes, bonds, or obligations issued by (1) any operating business trust or limited partnership organized under the laws of any state of the United States, the District of Columbia, the Dominion of Canada, any province of the Dominion of Canada or (2) an authority established pursuant to the California Industrial Development Financing Act, Title 10 (commencing with Section 91500) of the Government Code. The issuer of the notes, bonds, or obligations through itself or its paying agent shall be obligated thereunder to make payments, with respect to the notes, bonds, or other obligations, directly to the insurer or the insurer's nominee. (b) Except upon the prior written approval of the commissioner, an investment may not be made under the authority of this section unless the note, bond, or obligation is exchange-traded. "Exchange-traded," as used in this subdivision, means listed and traded on the National Market System of the NASDAQ Stock Market or on a securities exchange subject to regulation, supervision, or control under a statute of the United States and acceptable to the commissioner. (c) Without the prior written consent of the commissioner investment made pursuant to this section shall not exceed in the aggregate 10 percent of the life insurer's policyholder surplus. (d) A request to the commissioner for (1) approval pursuant to subdivision (b) to invest in notes, bonds, or obligations that are not exchange-traded or (2) consent to exceed the 10 percent limitation set forth in subdivision (c), shall be in writing and shall be accompanied by any supporting data and documentation that the commissioner may require. The commissioner shall require the payment of a five thousand dollar ($5,000) fee in advance for the determination of whether to approve or disapprove each request. Each request shall be in writing and shall be deemed approved unless the commissioner disapproves it within 60 days with respect to requests under subdivision (c) or 20 days with respect to requests under subdivision (b), after the request has been filed in the commissioner' s office. (e) This section shall not be construed to increase or reduce the authority to invest in any operating business trust or limited partnership specifically permitted in other sections of this code.