Legislature(1999 - 2000)
02/17/1999 03:24 PM House L&C
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
February 17, 1999
3:24 p.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chairman
Representative Andrew Halcro, Vice Chairman
Representative Jerry Sanders
Representative Lisa Murkowski
Representative John Harris
Representative Tom Brice
Representative Sharon Cissna
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
* HOUSE BILL NO. 83
"An Act relating to the licensing of, acts and practices of, notice
filings required of, duties of, registration of, capitalization of,
financial requirements for, bonding of, coordinated securities
examinations of, recordkeeping by, and documents filed by certain
securities occupations; relating to public entity investment pools;
relating to investment advisory contracts; relating to the
examination of records of certain securities occupations; relating
to federal covered securities; relating to the registration of
securities; relating to the general exemptions for securities and
transactions; relating to offers of securities on the Internet;
relating to the confidentiality of investigative files under the
Alaska Securities Act; relating to the payment by certain
securities occupations of expenses and fees of investigations and
examinations; relating to petitions to superior court by the
administrator to reduce civil penalties to judgment; exempting
certain violations of the Alaska Securities Act from criminal
penalties; relating to time limitations in bringing court actions
for violations of the Alaska Securities Act; relating to the
affirmative defense of timeliness in court actions relating to
securities; prohibiting certain lawsuits involving buyers of
securities; relating to time limitations for bringing court actions
involving the receipt of a written offer related to securities;
relating to offers to repay buyers of securities; relating to
notification of certain securities occupations regarding
administrative hearings; relating to fees established by the
administrator; relating to a sale, a purchase, or an offer to sell
or purchase under the Alaska Securities Act; relating to the
locations of offers to buy or sell; relating to consent to service;
amending the Alaska Securities Act definitions of 'agent,'
'broker-dealer,' 'person,' 'Securities Act of 1933,' and
'security;' defining for purposes of the Alaska Securities Act
'advisory client,' 'advisory fee,' 'advisory services,' 'Bank
Holding Company Act of 1956,' 'clients who are natural persons,'
'federal covered adviser,' 'federal covered security,' 'Federal
Deposit Insurance Act,' 'Home Owners' Loan Act,' 'investment
adviser representative,' 'Investment Advisers Act of 1940,'
'investment advisory business,' 'investment advisory contract,'
'Investment Company Act of 1940,' 'NASDAQ,' 'National Securities
Markets Improvement Act of 1996,' 'notice filing,' 'place of
business,' 'principal place of business,' 'Securities Exchange Act
of 1934,' 'securities business,' 'state investment adviser,'
'substantial portion of the business,' 'supervised person,' and
'viatical settlement'; relating to the title of the Alaska
Securities Act; relating to the definitions in the Alaska
Securities Act of 'assignment' and 'investment adviser'; relating
to implementation of the changes to the Alaska Securities Act; and
providing for an effective date."
- HEARD AND HELD
(* First public hearing)
PREVIOUS ACTION
BILL: HB 83
SHORT TITLE: ALASKA SECURITIES ACT
SPONSOR(S): LABOR & COMMERCE BY REQUEST
Jrn-Date Jrn-Page Action
2/08/99 163 (H) READ THE FIRST TIME - REFERRAL(S)
2/08/99 164 (H) L&C, JUD
2/17/99 (H) L&C AT 3:15 PM CAPITOL 17
WITNESS REGISTER
FRANKLIN TERRY ELDER, Acting Director
Division of Banking, Securities and Corporations
Department of Commerce and Economic Development
P.O. Box 110807
Juneau, Alaska 99811-0907
Telephone: (907) 465-2521
POSITION STATEMENT: Testified on HB 83.
ACTION NARRATIVE
TAPE 99-9, SIDE A
Number 0001
CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce
Standing Committee meeting to order at 3:24 p.m. Members present
at the call to order were Representatives Rokeberg, Halcro,
Murkowski, Harris, Brice and Cissna. Representative Sanders
arrived sometime before 3:31 p.m.
HB 83 - ALASKA SECURITIES ACT
Number 0032
CHAIRMAN ROKEBERG noted the first order of business is HB 83, "An
Act relating to the licensing of, acts and practices of, notice
filings required of, duties of, registration of, capitalization of,
financial requirements for, bonding of, coordinated securities
examinations of, recordkeeping by, and documents filed by certain
securities occupations; relating to public entity investment pools;
relating to investment advisory contracts; relating to the
examination of records of certain securities occupations; relating
to federal covered securities; relating to the registration of
securities; relating to the general exemptions for securities and
transactions; relating to offers of securities on the Internet;
relating to the confidentiality of investigative files under the
Alaska Securities Act; relating to the payment by certain
securities occupations of expenses and fees of investigations and
examinations; relating to petitions to superior court by the
administrator to reduce civil penalties to judgment; exempting
certain violations of the Alaska Securities Act from criminal
penalties; relating to time limitations in bringing court actions
for violations of the Alaska Securities Act; relating to the
affirmative defense of timeliness in court actions relating to
securities; prohibiting certain lawsuits involving buyers of
securities; relating to time limitations for bringing court actions
involving the receipt of a written offer related to securities;
relating to offers to repay buyers of securities; relating to
notification of certain securities occupations regarding
administrative hearings; relating to fees established by the
administrator; relating to a sale, a purchase, or an offer to sell
or purchase under the Alaska Securities Act; relating to the
locations of offers to buy or sell; relating to consent to service;
amending the Alaska Securities Act definitions of 'agent,'
'broker-dealer,' 'person,' 'Securities Act of 1933,' and
'security;' defining for purposes of the Alaska Securities Act
'advisory client,' 'advisory fee,' 'advisory services,' 'Bank
Holding Company Act of 1956,' 'clients who are natural persons,'
'federal covered adviser,' 'federal covered security,' 'Federal
Deposit Insurance Act,' 'Home Owners' Loan Act,' 'investment
adviser representative,' 'Investment Advisers Act of 1940,'
'investment advisory business,' 'investment advisory contract,'
'Investment Company Act of 1940,' 'NASDAQ,' 'National Securities
Markets Improvement Act of 1996,' 'notice filing,' 'place of
business,' 'principal place of business,' 'Securities Exchange Act
of 1934,' 'securities business,' 'state investment adviser,'
'substantial portion of the business,' 'supervised person,' and
'viatical settlement'; relating to the title of the Alaska
Securities Act; relating to the definitions in the Alaska
Securities Act of 'assignment' and 'investment adviser'; relating
to implementation of the changes to the Alaska Securities Act; and
providing for an effective date."
CHAIRMAN ROKEBERG called on Franklin Terry Elder from the
Department of Commerce and Economic Development.
Number 0053
FRANKLIN TERRY ELDER, Acting Director, Division of Banking,
Securities and Corporations, Department of Commerce and Economic
Development, stated HB 83 is the son of HB 486 from last year. It
amends the Alaska Securities Act and brings it into compliance with
the changes in federal securities laws - the National Securities
Markets Improvement Act (NSMIA), passed in 1996. The Act created
a new kind of security called a covered security which is preempted
from state registration. There is also a new kind of investment
adviser called a covered adviser which is also preempted from state
registration. However, in order to be revenue neutral and to
continue giving anti-fraud authority over the securities as well as
the investment advisers, Congress allowed the states to require
notice filings and fees, and gave them a three-year window to
change their statutes and regulations. Most of HB 83 is for that
purpose, and the most of the language for the NSMIA-related changes
was drafted by the North American Securities Administrators
Association (NASAA), an organization comprised of the securities
administrators across the states, Mexico, Canada, and the District
of Columbia. NASAA, among other activities, writes the "uniform
securities act," drafting uniform legislation for the states to
use. Alaska is one of 38 or so states that has adopted the
"uniform securities act" to maintain uniform securities regulations
across the states. House Bill 83 also updates language and makes
changes to the Alaska Securities Act according to experience and
NASAA recommendations. A lot of those changes were also drafted by
NASAA; for example, the provisional registration for Canadian
brokers giving reciprocity to U.S. brokers and the credit
investment exemption. He noted that 70 percent of the bill is
related to NSMIA and 30 percent is not related to NSMIA. When HB
486 was introduced last year letters of support were submitted from
the Investment Company Institute (ICI) and the Investment Counsel
Association of America (ICAA) and they have indicated that there is
no problem in using their letters again to support HB 83. In
addition, this time around there are two more letters of support
from industry associations and a letter of support from NASAA that
have been included in the bill packet.
Number 0570
CHAIRMAN ROKEBERG asked Mr. Elder whether it would be possible to
get updated letters because these refer to the other bill. He
noted the other body might be more particular.
MR. ELDER replied he would see what he could do.
Number 0597
CHAIRMAN ROKEBERG referred to Section 65, page 61, and suggested
going over some of the definitions to get a better understanding of
securities. For example, he has difficultly distinguishing the
terms "broker-dealer", "covered securities", "investment adviser",
"federal covered adviser" and "investment adviser representative".
Number 0693
MR. ELDER explained, in current law, investment advisers are the
people who give investment advice on securities for compensation.
A broker-dealer is a firm that effects security transactions, such
as Salomon Smith Barney Incorporated or Merrill Lynch and Company,
Incorporated. Agents are the people who work for broker-dealers
and charge a commission. An agent of an issuer is a person who
represents the issuer of a security. For example, small companies
may sell securities themselves thereby effecting the transaction
and acting as an agent. Therefore, an agent may be an agent of an
issuer or an agent of a broker-dealer. These players are only
modestly changed by HB 83, except for investment advisers. NSMIA
created "federal covered advisers" - those who manage $25 million
or more in assets - and mandates them to register with the U.S.
Securities and Exchange Commission (SEC). The state investment
advisers, however, register only with the states.
Number 0930
CHAIRMAN ROKEBERG asked Mr. Elder the scope of an adviser's work
and how it is differentiated from broker-dealer agents.
MR. ELDER replied advisers sell specific portfolio advice, while
broker-dealer agents sell transactions. For example, an adviser
could suggest buying 100 shares of Eastman Kodak Company.
CHAIRMAN ROKEBERG asked Mr. Elder whether the term "financial
planner" is more characteristic of an adviser.
MR. ELDER replied they call themselves all sorts of things, but the
state calls them "investment advisers."
Number 1037
CHAIRMAN ROKEBERG asked Mr. Elder whether a person can be an agent
for a broker-dealer as well as a federal covered adviser.
MR. ELDER replied yes if referring to agents. A person is more
likely to be an agent for a broker-dealer and an investment adviser
representative for a federal covered adviser.
MR. ELDER continued. In relations to the 100 shares of Eastman
Kodak Company example, a broker-dealer agent can effect the
transaction. Sometimes they are combined into one. In other
words, the person giving the investment advice can also effect a
transaction as well. The current law does not have "federal
covered advisers", "state investment advisers", and "investment
adviser representatives" - the same as agents to a broker-dealer.
These terms have been added to conform to NSMIA. Even though
states can no longer require federal covered advisers to register
with them, they "may" require them to file a notice and pay a fee.
The states also retain authority for anti-fraud provisions in the
event a federal covered adviser perpetrates a fraud.
Number 1210
CHAIRMAN ROKEBERG asked Mr. Elder why the language reads "may"
instead of "shall".
MR. ELDER replied he isn't sure because they are paying fees now.
The division already has regulations drafted setting a fee
schedule, assuming the bill passes. NSMIA says states "may"
require a notice filing and fee, therefore, it is allowed by the
federal government.
CHAIRMAN ROKEBERG asked Mr. Elder whether he is using a
discretionary "may" to draft regulations to mandate a filing and
fee.
MR. ELDER replied that's correct. There will be a fee.
MR. ELDER continued. The bill, therefore, flushes out the
investment adviser side entirely and brings it into compliance with
federal law. It also adds the terms, "covered adviser", "state
investment adviser", and "investment adviser representative" to
state law. Since 1996 the division has required them to file a
notice and pay a fee and they have been doing that.
Number 1328
CHAIRMAN ROKEBERG asked Mr. Elder whether major broker-dealers
before 1996 were not paying a fee to the state.
MR. ELDER replied, no, they were paying a fee. The bill really
does not affect the broker-dealers. NSMIA affects broker-dealers
by saying that states can no longer require books and records to be
kept any differently than what the SEC requires.
Number 1364
CHAIRMAN ROKEBERG asked Mr. Elder whether that is where the three
years for the retention of records comes from.
MR. ELDER replied no. In the past every state could establish
rules, regulations and statutes for keeping books and records.
NSMIA says that from now on the SEC will do that. In other words,
the states cannot make any financial requirements of the
broker-dealers that are different than what the SEC requires. It
affects Alaska because before 1996 the state required
broker-dealers to post a $5,000 bond. That is about the only
change to broker-dealers in the bill. However, investment advisers
on the other hand will notice a lot in relation to their
registration with either the SEC or the states.
Number 1438
CHAIRMAN ROKEBERG asked Mr. Elder whether investment advisers were
registered with the state in some other capacity previously or will
they be newly swept up.
MR. ELDER replied most were registered with the state because
everybody was an investment adviser.
Number 1459
CHAIRMAN ROKEBERG stated, in response, that the numbers will remain
the same, just the categories will change.
MR. ELDER responded that is correct. Some will be state investment
advisers and some will be federal covered advisers.
MR. ELDER continued. The definition for an "investment adviser
representative" is that established by the SEC in the bill.
Number 1495
CHAIRMAN ROKEBERG stated he noticed that both the state and federal
advisers are defined similarly.
MR. ELDER responded that is correct.
Number 1518
CHAIRMAN ROKEBERG asked Mr. Elder to discuss the fiscal note. A
figure of $3.9 million is floating around.
MR. ELDER replied the division has supplied an information-only
fiscal note to give an idea of what would happen if the state did
not bring its securities Act into compliance with federal law.
Number 1569
CHAIRMAN ROKEBERG asked Mr. Elder where does the $3.9 million
actually come from.
MR. ELDER replied it is not delineated in the fiscal note because
almost all of it comes from mutual fund filings. There are very
few "regulation D 506" filings. The $25,000 for federal covered
advisers was not included. In essence, the revenue impact reflects
what would happen if the state didn't come into compliance with
federal law and if mutual funds stopped paying filing and notice
fees.
Number 1625
CHAIRMAN ROKEBERG asked Mr. Elder where the notice fees are
required in the bill.
MR. ELDER replied they are required in Section 33, page 35, and
explained it adds a new section [AS 45.55.075] to the Alaska
Securities Act. The real impact, however, is on mutual funds, not
just securities.
CHAIRMAN ROKEBERG asked Mr. Elder where the bill says the money is
coming from.
MR. ELDER referred to page 35, lines 10-13 and read, "(a) unless
otherwise exempt under AS 45.55.900, a security that is a federal
covered security under 15 U.S.C. 77r(b)(2), (Securities Act of
1933), may only be offered for sale and sold into, from, or within
the state upon the administrator's receipt of". Those are mutual
funds...
CHAIRMAN ROKEBERG interjected and asked Mr. Elder whether the money
is in the filing fees.
MR. ELDER replied, "Yes."
CHAIRMAN ROKEBERG referred to page 35, lines 19-21, "(3) a notice
filing fee as prescribed by the administrator for a notice filing
under this section and, if necessary to compute the fee, a report
of the value of the federal covered securities offered or sold in
this state.", and asked Mr. Elder whether that is where the $3.9
million comes from.
MR. ELDER answered in the affirmative. Part of the regulations
that the division will be adopting will include fees for that as
well.
Number 1717
REPRESENTATIVE BRICE asked Mr. Elder how the fees are prescribed.
MR. ELDER replied currently there is a $100 filing fee and a .1
percent of the dollar amount being registered here, with a minimum
of $100 and a maximum of $3,000. For example, if an agency
registered $100,000 of funds, there would be a $100 filing fee plus
a $100 notice fee.
Number 1775
CHAIRMAN ROKEBERG asked Mr. Elder whether the state received these
funds before the passage of NSMIA.
MR. ELDER replied correct.
CHAIRMAN ROKEBERG asked Mr. Elder to inform the committee of the
Fiscal Year (FY) 1998 and 1999 fees.
MR. ELDER replied he didn't bring that information with him, but it
is somewhere in the range of $3.2 million.
CHAIRMAN ROKEBERG asked Mr. Elder whether the $3.9 million figure
is based on a slight increase.
MR. ELDER replied there has been substantial growth over the last
several years.
CHAIRMAN ROKEBERG asked Mr. Elder whether there is a fee adjustment
at the end of the year for an actual amount versus the amount
filed.
MR. ELDER replied it is more complicated than that. In fact, the
division plans to do away with its current type of fee structure
and move toward a flat fee. Currently, they register in advance
what they think they can sell in a good-faith effort, and send
another application if it looks like they will exceed the amount.
CHAIRMAN ROKEBERG stated they have to monitor the amount and
periodically send the division additional notice fees to keep
current.
MR. ELDER responded correct. They keep current during their
registration/notice period - two years - otherwise, the state will
take action against them.
Number 1902
CHAIRMAN ROKEBERG asked Mr. Elder whether each mutual fund within
a family of funds has to be registered.
MR. ELDER replied, yes, every portfolio has to be registered.
MR. ELDER continued. The current fee structure requires a lot of
extra paperwork for both the agent filing and the state. Thus, the
trend among other jurisdictions is to go to a flat fee. The
division doesn't care whether $1 million or $1 billion is sold. In
addition, with a flat fee they won't have to worry about over-sells
either. Everybody wins in a flat fee schedule.
Number 1977
CHAIRMAN ROKEBERG noted that there are huge disparities between the
size of funds.
MR. ELDER noted, generally, the fees are minuscule compared to what
else they do.
CHAIRMAN ROKEBERG asked Mr. Elder whether he knows how much is
taken in from Fidelity Investments, for example, compared to
smaller funds.
MR. ELDER replied the division doesn't keep track of each group,
just the total for mutual funds.
Number 2001
CHAIRMAN ROKEBERG asked Mr. Elder what would be the maximum income
under the existing number from funds doing business in the state.
MR. ELDER explained the division plans to set the fee at a rate
that would equal the average. Therefore, some individual funds
would see an increase and some would see a decrease.
CHAIRMAN ROKEBERG noted it would be a disincentive for smaller
funds compared to a sliding scale fee.
MR. ELDER responded that is possible. The argument for a flat fee
is the reduction of paperwork for both the industry and the state.
CHAIRMAN ROKEBERG noted a sliding scale fee would also reduce the
paperwork.
MR. ELDER replied he thought about a sliding scale fee also, but it
is real hard to implement. The industry knows about the flat-fee
plan, and if it comes back with a different idea the division would
be open to it.
CHAIRMAN ROKEBERG asked Mr. Elder what other states are doing.
MR. ELDER replied basically a flat fee.
CHAIRMAN ROKEBERG asked Mr. Elder roughly what would be the fee.
MR. ELDER replied more than what the division is thinking of
charging. He hasn't seen a survey of all the states, but he
recently saw a flat fee at $2,000 while the average for Alaska is
about $1,100.
CHAIRMAN ROKEBERG noted that Alaska is a small state.
MR. ELDER agreed. The state that now charges a $2,000 flat fee
used to have a sliding scale with a maximum of $1,600 instead of
$3,000 like Alaska.
CHAIRMAN ROKEBERG asked Mr. Elder what would it generate for Alaska
in terms of money.
MR. ELDER replied the total receipts should be the same with the
same number of filings.
Number 2097
CHAIRMAN ROKEBERG asked Mr. Elder, in that case, wouldn't the
fiscal note be flat.
MR. ELDER reiterated the fiscal note from the division is for
information only. The real fiscal note is zero. The money is
already being generated.
Number 2123
CHAIRMAN ROKEBERG stated the fiscal note indicates a $500,000
increase a year, and asked Mr. Elder whether going to a flat fee
would change it to a level number.
MR. ELDER replied no. That number reflects the increase in
filings. The average fee hasn't changed that much.
Number 2139
CHAIRMAN ROKEBERG wondered, if the market goes backwards, whether
the number of funds may...
MR. ELDER interjected and reiterated the fiscal note from the
division is for information only; its accuracy is not guaranteed.
CHAIRMAN ROKEBERG asked Mr. Elder what is the optimum level, around
$5 million, based on what there is now.
MR. ELDER replied a reasonable estimate is between $4 million and
$5 million.
CHAIRMAN ROKEBERG asked Mr. Elder whether he is talking about
$1,100 per month or what.
MR. ELDER replied he is talking about $1,100 per filing fee for a
notice.
Number 2168
MR. ELDER continued. In reference to the definition section of the
bill, a number of definitions were added because of the SEC, and
the bill looks the way it does because of legislative drafting
rules. For example, a definition was added for a "place of
business", "principal place of business" and "providing investment
advisory services" because they have to deal with how the SEC
defines an investment adviser representative. In addition, Section
69 defines "security" and clarifies a potential misunderstanding of
liability company interests. The language, ", notwithstanding the
limitations of AS 45.08.103(c);", was included in last year's bill
[HB 486] and the language, "fraction or pooled interest in a
viatical settlement contract;", has been added to this year's bill.
CHAIRMAN ROKEBERG referred to the definition of the word "viatical
settlement" on page 69, subsection (38), and asked Mr. Elder why
the bill is securing it when it is considered an insurance act.
Number 2299
MR. ELDER replied it is securing it because there is question about
what it is. Viatical settlements were created in order that a
terminally ill person could sell his/her life insurance policy to
a willing investor for a return. The return is a function of
various assumptions based on how much an investor is willing to pay
and how soon a terminally ill patient will die. Obviously, when
the assumptions change, the returns change. Securities
administrators around the country generally believe that when
interests are sold in a viatical settlement a security is being
created as an investment contract currently covered under the
definition of securities. However, courts have decided on both
sides of the issue. The problems in the rest of the country
primarily result from poor disclosure and marketing. Most
investors are told it is a guaranteed rate because the person is
going to die, but in the case of Acquired Immune Deficiency
Syndrome (AIDS) patients are living longer, causing those investors
to lose money of which the risks were not disclosed. He cited an
example of a viatical being advertised and sold in $5,000
increments with a guaranteed 42 percent rate of return. That is a
security and the division would be willing to say it is an
investment contract, but if actions were taken in court the state
would have to prove jurisdiction.
Number 2480
CHAIRMAN ROKEBERG asked Mr. Elder whether the division couldn't
take action now because it doesn't have statutory authority.
MR. ELDER replied the division could take action if it is egregious
on the concept that it is an investment contract.
TAPE 99-9, SIDE B
Number 0001
CHAIRMAN ROKEBERG asked Mr. Elder if viatical settlements are not
a security then what are the courts holding in non-jurisdiction.
Are they insurance settlements?
MR. ELDER replied the courts are finding that they are
non-investment contracts, not a security and, therefore, of no
consequence. In other words, the courts are not finding what they
are but what they are not. He reiterated there are court cases
throughout the country on both sides of the issue. He noted, that
although NSMIA supports the bill, the viatical business does not
support the bill.
Number 0049
REPRESENTATIVE MURKOWSKI asked Mr. Elder whether the other states
that recently passed this type of legislation included a viatical
definition.
MR. ELDER replied there are two or three states now that have
viatical settlements proposed in their bills in the definition of
"security". And, according to correspondence with other states, it
appears that there are another six to eight states interested in
including it in legislation. What is in the bill now seems to be
the general consensus on the direction that other states are going.
Number 0090
CHAIRMAN ROKEBERG asked Mr. Elder to provide the committee in
writing information on case law relating to viatical settlements,
why it is being done, and the other states involved to include in
the bill packet.
Number 0113
MR. ELDER stated that even though viatical was added to the
definition of "security", it shouldn't be a full registration.
Thus, the language, "(3) a security that represents a fractional or
pooled interest in a viatical settlement contract.", was added to
Section 34. It was added to the kinds of securities that are
subject to registration by notification, something less than a full
registration by qualification.
Number 0172
CHAIRMAN ROKEBERG asked Mr. Elder whether there are provisions in
the exemptions for this. In other words, what is the generic term
for AS 45.55.080(a)?
MR. ELDER replied a registration.
CHAIRMAN ROKEBERG asked Mr. Elder whether the issuer has to meet
the registration criteria.
MR. ELDER replied yes. An issuer has to meet the registration
criteria in AS 45.55.080(a).
CHAIRMAN ROKEBERG noted that it doesn't really work with some of
the other exemptions.
MR. ELDER responded correct. Actually, exemptions are available to
any issuer including issuers of fractional or pooled interest in
viaticals.
CHAIRMAN ROKEBERG asked Mr. Elder what the division calls this
section.
MR. ELDER replied it is called "registration by notification."
CHAIRMAN ROKEBERG noted it seems like a simple or quick type of
registration.
MR. ELDER replied it is simple.
Number 0263
REPRESENTATIVE HALCRO asked Mr. Elder to discuss the trends of
violations in regards to consumer protections.
MR. ELDER replied Alaska is blessed by its geography because it
protects it from the bad guys who float between states. In the
past few years, the kinds of problems have been with those who are
not registered as opposed to those who are registered. The
division has taken action against both kinds. He cited that a
person in Anchorage was fined $25,000 for giving investment advice
as a registered investment adviser when he was not registered. On
the other hand, a registered investment adviser was fined $25,000
for effecting transactions outside the scope of his authority. In
addition, a lot of things the division does to help investors don't
always include formal actions. Mr. Elder cited a call from a woman
who noticed unauthorized broker-dealer transactions of which the
broker-dealer corrected and made her account whole again. No
action was taken against the broker-dealer because it was
discovered that her husband probably authorized the transactions,
but Mr. Elder said he lectured the agency and its employees and
gave them a warning. He also cited a case of a complaint against
an unsuitable broker-dealer who was issued an order.
Number 0464
CHAIRMAN ROKEBERG stated he assumed that most of the operating
investment bankers in the state would be under SEC jurisdiction and
not the state. Is that where it overlaps sometimes?
MR. ELDER responded there is triple overlap on the broker-dealer
side. They are generally members of the National Association of
Securities Dealers (NASD), an industry association, registered with
the SEC and the state. In the case of the investment adviser in
Anchorage, that adviser was an agent of a broker-dealer that took
action costing him another $15,000 for the same offense.
Number 0516
REPRESENTATIVE HALCRO referred to Section 50 and noted that a new
subsection has been added allowing the state to go after
out-of-state violators. It sounds that it is more of a
precautionary measure rather than responding to a trend.
Number 0557
MR. ELDER explained Section 50 was not part of last year's bill.
The subsection allows an order to be appealed to the superior court
at which point the order is final. If it is not appealed then, of
course, the order is final. But, once an order is final, the
division can approach the superior court and ask that the civil
fine be reduced to judgment without starting a hearing again, and
register the judgment in whatever jurisdiction needed. The genesis
of the subsection comes from a growing frustration in dealing with
out-of-state violators of the securities Act. He cited last summer
a Californian who wasn't registered ripped off an Alaskan investor.
An order was issued and the Californian thumbed his nose at the
state. The only thing the state could do was send the order to
California and post the person's name on investigative bulletin
boards. The section, therefore, was a proposal from the Department
of Law as a means to file it in the offender's jurisdiction and to
hit the offender in the pocket where it counts. The real danger
for the future is from someone on the telephone or Internet who is
not in Alaska.
Number 0740
REPRESENTATIVE HALCRO asked Mr. Elder whether Sections 2 and 3, the
revocation for noncompliance with child support enforcement
requirements, involve the state's ability to affect people who
don't pay child support, especially in relation to the appeal to
the supreme court involving the revocation a driver's license.
MR. ELDER replied he doesn't know. Licensing for a business is
probably viewed differently than licensing to drive. One might be
considered a privilege while the other might be considered a right.
CHAIRMAN ROKEBERG interjected the Child Support Enforcement
Division [Department of Revenue] covers occupational licensing.
MR. ELDER stated the law requires the division to review a list of
those who are deficient in both student loans and child support
payments, but it can't take action. Therefore, it is implemented
in Section 27, AS 45.55.060(a) by adding the language, "(11) is a
person whose license renewal is denied under AS 14.43.148 or whose
license issuance or renewal is denied under AS 25.27.244."
Number 0877
REPRESENTATIVE HALCRO noted that the inclusion would allow the
division to extract child support. However, if a license is taken
away a person can't make a living, thereby rendering that person
incapable of making child support payments. He asked Mr. Elder
whether the intent is to use it as leverage.
MR. ELDER replied he presumes that someone would do whatever it
takes to keep a license. The current law requires the division to
take action against a license if a person is delinquent. If there
is a constitutional problem with it, either the Department of Law
or Legislative Legal Counsel [Legislative Legal and Research
Services, Legislative Affairs Agency] would have raised the issue.
It was part of last year's bill.
Number 1033
REPRESENTATIVE HARRIS asked Mr. Elder whether the bill just ran out
of time last year or were there other complications and what were
they, if any.
MR. ELDER replied the bill ran out of time last year because it was
in conference. A one-sentence amendment was placed in the bill by
a member of the Senate relating to the Alaska Native Claims
Settlement Act (ANCSA) and proxy filings in Section II B. It went
through the House Labor and Commerce Standing Committee, the House
of Representatives, and the Senate Labor and Commerce Standing
Committee without a problem. The problem related to a lawsuit
between a director of Cook Inlet Region, Incorporated (CIRI) and
CIRI that caused concern. The House did not accept the amendment
and the bill went into conference, at which point it died. House
Bill 83 removes any sections dealing with ANCSA and proxy filings.
Number 1237
CHAIRMAN ROKEBERG explained that some voted no because the bill was
over 20 pages long.
MR. ELDER noted that some felt it could be fixed the next year
because of an October 1999 deadline. It makes his life more
difficult, however, because he has to get the statute through the
legislature and adopt regulations in the same year.
Number 1275
CHAIRMAN ROKEBERG asked Mr. Elder what it cost the division in
manpower, time and money because it did not pass last year.
MR. ELDER replied it mostly cost time. There are only three
securities examiners for the whole state and if one is taken out to
work on legislation that is a one-third reduction in the effort to
administer the securities Act. It was a significant hit on the
division and Alaska because it continues to be a state that is not
in compliance with federal law. He referred to a group of
attorneys that file security applications with various states that
have started discussing what to do about the states that have not
complied with federal law. If Alaska does not come into
compliance, it puts the $4 million to $5 million of annual fees at
risk and the ability to help customers of state investment advisers
or federal covered advisers. He explained what hits the SEC's
radar screen is monumental in terms of dollars, and noting the
individual mentioned earlier with a loss of $6,000 that the
division helped get whole again would not have been helped by the
SEC.
Number 1479
CHAIRMAN ROKEBERG stated that is a good point.
CHAIRMAN ROKEBERG referred to page 7, starting on line 31, "(2) [AN
ASSIGNMENT OF THE CONTRACT MAY NOT BE MADE BY THE INVESTMENT
ADVISER WITHOUT THE CONSENT OF THE OTHER PARTY TO THE CONTRACT; AND
(3)]", and noted the language is being deleted. He asked Mr. Elder
whether an adviser would be allowed to make an assignment with
consent.
MR. ELDER replied yes. The paragraph is simply being moved to
Section 45.55.023 [Section 9].
CHAIRMAN ROKEBERG referred to Section 9, and asked Mr. Elder
whether the categories are new.
Number 1616
MR. ELDER explained it is language that NASAA developed. Section
9 includes investment advisers, broker-dealers and agents. A lot
of what is in Section 9 is currently in regulation and the bill
moves it to statute. However, there isn't a lot about the behavior
of investment advisers and their representatives in statute because
before NSMIA they were registered with the SEC. Now, because there
are state investment advisers who do not register with the SEC, the
rules needs to be codified in statute. The language is new, but
not to the people in the business. There is nothing illegal in the
bill that is legal now because they were covered by the SEC and
those categories are in these sections.
Number 1749
CHAIRMAN ROKEBERG referred to page 9, lines 24-25 and said: "What
about short-selling? And, am I confusing the borrowing of a
security for a short-sell with another technical mechanism? Don't
you borrow securities to allow a placement or is it selling short?
Or are you using just a colloquial term? It's not really
borrowing?"
MR. ELDER replied that's right. This refers to state investment
advisers, federal covered advisers and investment adviser
representatives, not broker-dealers.
CHAIRMAN ROKEBERG referred to margin calls on selling (indisc.)
money and noted that they are advisers, not investment bankers.
MR. ELDER replied correct.
Number 1849
CHAIRMAN ROKEBERG referred to page 10, line 25, "(A) compensation
arrangements connected with advisory services to a client if the
arrangements are in addition to compensation from the client for
those services; and"...
MR. ELDER interjected and stated that the subsection relates to the
failure to disclose compensation arrangements other than what the
client pays.
CHAIRMAN ROKEBERG asked Mr. Elder whether a commission for
recommending a mutual fund, for example, needs to be disclosed.
MR. ELDER replied yes.
Number 1979
REPRESENTATIVE HARRIS referred to page 10, line 19, "(10) charging
a client an unreasonable advisory fee;", and asked Mr. Elder who
determines an unreasonable advisory fee.
MR. ELDER replied it is related to what is available in the local
market. For example, if the market is charging 3 percent and
someone is charging 15 percent, that would probably be considered
unreasonable.
REPRESENTATIVE HARRIS asked Mr. Elder whether it would have to be
something fairly extreme before worrying about it.
MR. ELDER replied yes, to take action.
Number 1997
CHAIRMAN ROKEBERG referred to page 13, lines 17-18, "A
broker-dealer and an agent shall observe high standards of
commercial honor and just and equitable principles of trade in the
conduct of their business.", and asked Mr. Elder whether
"commercial honor" is an artful term.
MR. ELDER replied he likes the term. It was lifted out of other
state securities Acts. Financial institutions should show
commercial honor.
Number 2051
CHAIRMAN ROKEBERG asked Mr. Elder what is commercial honor. Is it
a different standard than chivalry and honor, for example?
MR. ELDER replied commercial honor means full disclosure and
treating people fairly.
CHAIRMAN ROKEBERG wondered whether it needs to be defined.
MR. ELDER noted that it is defined in the bill.
Number 2104
CHAIRMAN ROKEBERG replied he disagrees. He said, "You got high
standards of commercial honor then you're saying that's dishonest.
That's a little different. I mean, your saying negative, but it's
not defining it."
MR. ELDER stated the intent is to take action on those acts that
are enumerated in the bill. They are an embodiment of a violation
of the standards of honor, just and equitable principles.
CHAIRMAN ROKEBERG stated that when reading the bill this area
slowed him down. He suggested talking further about it later.
CHAIRMAN ROKEBERG referred to page 13, line 3, "(b) The conduct
listed in (a) of this section is not the exclusive conduct
prohibited by (a) of this section.", and asked Mr. Elder whether it
is like the Uniform Code of Military Justice (UCMJ).
MR. ELDER replied it provides the division with further authority
to expand the conduct list by regulation.
CHAIRMAN ROKEBERG noted it is a blank check. He asked whether it
is part of the language in NSMIA.
MR. ELDER replied it is part of NSMIA and drafted by NASAA.
CHAIRMAN ROKEBERG stated it looks like the division is granting
itself a significant amount of power.
MR. ELDER replied it doesn't really change anything. Most
violations are currently listed in regulation. However, by
enumerating those violations in statute makes it more clear to
those who read it.
CHAIRMAN ROKEBERG announced the bill will be held over for further
consideration. He hopes that it will be passed out of the
committee on Friday, February 19, 1999.
ADJOURNMENT
Number 2414
CHAIRMAN ROKEBERG adjourned the House Labor and Commerce Standing
Committee meeting at 4:58 p.m.
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