Legislature(1999 - 2000)
02/19/1999 03:25 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 19, 1999
3:25 p.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chairman
Representative Andrew Halcro, Vice Chairman
Representative John Harris
Representative Sharon Cissna
MEMBERS ABSENT
Representative Jerry Sanders
Representative Lisa Murkowski
Representative Tom Brice
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
2/17/99 (H) HEARD AND HELD
2/17/99 (H) MINUTE(L&C)
2/19/99 (H) L&C AT 3:15 PM CAPITOL 17
WITNESS REGISTER
FRANKLIN TERRY ELDER, Director
Division of Banking, Securities and Corporations
Department of Commerce and Economic Development
P.O. Box 110807
Juneau, Alaska 99811-0807
Telephone: (907) 465-2521
POSITION STATEMENT: Testified on HB 83, answered questions.
JACK GWALTNEY, President
Premiere Investments and Insurance
7118 Linden Drive
Anchorage, Alaska 99502
Telephone: (907) 297-7309
POSITION STATEMENT: Testified on HB 83 regarding viatical
settlements.
DAVID GWALTNEY
6217 Chevigny Street
Anchorage, Alaska 99502
Telephone: (907) 297-7302
POSITION STATEMENT: Testified on HB 83 regarding viatical
settlements.
ACTION NARRATIVE
TAPE 99-10, SIDE A
Number 0001
CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce
Standing Committee meeting to order at 3:25 p.m. Members present
at the call to order were Representatives Rokeberg, Halcro, Harris
and Cissna.
HB 83 - ALASKA SECURITIES ACT
Number 0044
CHAIRMAN ROKEBERG announced the committee's order of business was
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 indicated some
teleconference testimony would be received in addition to Mr.
Elder's testimony.
Number 0088
FRANKLIN TERRY ELDER, Director, Division of Banking, Securities and
Corporations, Department of Commerce and Economic Development, came
forward to testify on HB 83.
Number 0102
CHAIRMAN ROKEBERG indicated Mr. Elder had provided letters
regarding the legislation to the committee. The chairman also
complimented Mr. Elder on his recent appointment as division
director. Chairman Rokeberg referred to three letters: 1) from
the Division of Banking, Securities and Corporations to Mr. Jack
Gwaltney of Premiere Investments and Insurance in Anchorage
alleging that Mr. Gwaltney was marketing a security on a viatical
settlement issue improperly under statute. 2) A reply to the state
from Mr. Gwaltney dated that day. 3) A letter from Mr. Elder to
Chairman Rokeberg regarding the general issue with some back-up
regarding the status of viatical settlements.
CHAIRMAN ROKEBERG stated the issue was whether or not viatical
instruments were securities, noting there was case law in both
directions. He indicated Maine had enacted formal legislation, and
Missouri and Oregon had bills pending. The chairman described that
viaticals were the "securitization" or sales of interests in
insurance proceeds from, normally, someone who was dying
prematurely. He indicated Marianne Burke, Director, Division of
Insurance, Department of Commerce and Economic Development,
believed the Division of Banking, Securities and Corporations was
the proper domain for viatical instruments, as Mr. Elder and his
staff had asserted relating to Mr. Gwaltney's case. He noted the
issue was one of turf: whether viaticals should be regulated by
insurance or the securities board. Chairman Rokeberg commented Mr.
Gwaltney was present via teleconference to testify. The chairman
mentioned there were three or four provisions in the bill regarding
the viatical agreement.
Number 0322
MR. ELDER said there were three: 1) a definition of viaticals, 2)
a changed in the definition of "security" adding viaticals, 3) a
changed in AS 45.55.080 adding viaticals to "registration by
notification."
CHAIRMAN ROKEBERG asked if the legislation's provisions concerning
viaticals were necessary for the collection of fees being
discussed, the reason this legislation was necessary.
Number 0364
MR. ELDER replied the provisions were a non-NSMIA [National
Securities Market Improvement Act, 1996] part of the bill; the
provisions were not part of the changes needed to the Alaska
Securities Act [Alaska Securities Act of 1959, AS 45.55] to
continue collecting fees.
CHAIRMAN ROKEBERG confirmed from Mr. Elder that he was not opposed
to the removal of the bill sections concerning viaticals, to be
addressed in separate legislation, if that would facilitate HB 83's
passage. The chairman indicated removing those sections from HB 83
would be his desire based on his current understanding, with the
committee taking that issue up separately. He indicated he
believed it was necessary to define the Division of Banking,
Securities and Corporations' statutory authority for their actions
in this area.
Number 0516
JACK GWALTNEY, President, Premiere Investments and Insurance,
testified next via teleconference from Anchorage. He spoke from a
prepared statement:
"Chairman Rokeberg and members of this committee. Thank
you for the opportunity to discuss HB 83 and recent
requirements and allegations from the Division of Banking
and Securities [Division of Banking, Securities and
Corporations] that is adversely affecting commerce and
the consumers of Alaska ....
"My discussion today partially deals with what I feel is
a constitutional breach of rights. Further, I am
somewhat incensed by the implication that I have broken
a statute which hasn't even been put in place and that
'formal action will be held in abeyance pending
response.' If it turns out that legislation passes which
makes viatical investments a security, you can rest
assured I will never attempt to sell another viatical.
To have the specter hanging over my head that I could be
charged with criminal action is quite alarming. When I
first spoke to Mr. Salveson of the Division of Banking
and Securities, whom I called after one of our agents
received a phone call to cease and desist, I agreed
verbally at that time to cease and desist until as he put
it, 'We can get this thing straightened out.' Now comes
a letter indicating I might be charged with violation of
the Alaska Securities Act, and that I am required to
submit the names of my clients and many other documents,
which I'm prepared to do.
"The definition of viatical has most definitely not been
addressed by statute in this and many other states. Of
those states which have classified the product, all have
opted for a definition in favor of being guided under
insurance laws and not securities. Apparently there have
been some exceptions to that at this point. The
legislature in Alaska can choose to classify the product
as it wishes, though it looks likely they will be one of
the few states that have opted in the direction that HB
83 seems to be heading on this issue, and again I'm aware
that there are some others.
"It is my understanding the state of Florida has enacted
legislation that has served as a model to many other
states. One of the main questions at issue with the
Division of Securities and Banking is that they consider
viaticals an investment contract. Thus far viaticals
seem have been viewed as personal property similar to
real estate. In real estate, a purchaser is exchanging
money for property of value. This represents a fixed
value, not the definition of a security. Also at issue
is the fact that most policies are sold in fractional
amounts which usually constitute several parts of the
face value of a policy, or otherwise called a death
value. I have provided Representative Rokeberg with
additional information of this subject.
"The Future First Viatical settlement program does not
meet the definition of a security under SEC [Securities
and Exchange Commission] v. W.J. Howey Company, 328
United States 293 in 1946. The Supreme Court under
section 2.1 of the Securities Act defined an investment
contract 'as an investment of money undertaken with the
expectation of profit, whose profits are derived solely
from the efforts of others with existence of a common
enterprise.' The assertion that viatical settlements
require an investment of money with the expectation of
profit cannot be argued. We can easily argue, however,
that it seems apparent to reasonable people that 'profit
derived solely from the efforts of others,' and
'existence of a common enterprise' remain definitely
excluded. Further, viaticals do not place principal at
risk and provide a guaranteed return subject to carrier
solvency, which is a separate issue addressed under Title
21 of the Alaska Statutes, and viaticals have not been
deemed securities by the SEC, which seems to carry as
much weight as any argument I can imagine.
"My immediate concern is the arbitrary application of a
cease and desist order on a product which is not
addressed in any current statute or regulation, and, to
my understanding and research, is only now pending
definition. One of my associates has performed a word
search on what I believe are the statutes relating to
both Titles 45 and 21, and the term 'viatical' is not
found, at least at this point. It appears to me that the
allegation that these products conform to the investment
securities Act seems to be a matter of opinion until it
is defined by statute.
"Issuing a cease and desist order without defined
regulatory authority seems to be a classical breach of
constitutional rights. It is my understanding that
regulators exist to protect the public interest and
welfare. Regulators protect the public at large from
unscrupulous providers and inappropriate products. The
sale of viaticals at present represents no such threat to
public welfare. These products have been sold for a long
time and, in my experience, have yet to have a single
consumer complaint in Alaska. Consumers are now unable
to exercise their right to purchase these products.
"During a similar controversy over surplus lines and the
Division of Insurance, the division solicited advice,
counsel and testimony from numerous sources and began
issuing bulletins on findings. A subsequent law was
promulgated and enforced with a defined inception date,
and penalties for noncompliance. This was a reasonable
approach to the situation. During the fact-finding
period, no producers were held to a standard or law that
'might' be passed. They dealt only with what was, then
offered a period of time to gain compliance after the law
was passed. Do these products need to be regulated? Of
course they do, most definitely they do. I feel that
they are reflective of insurance products more than
securities or investment products. Again, Representative
Rokeberg is in possession of preliminary information that
will support this position. Even so, in the absence of
statutory regulation we, the public, cannot be held
accountable for laws that do not exist.
"Please note, without question, if HB 83 passes in its
current form, we will comply with all appropriate law and
statutes, just as I have with the insurance law for the
past 38 years without incident, allegation or consumer
complaint.
"To summarize, I am complying with the cease and desist
order despite the fact I feel it's grossly inappropriate.
I will follow this testimony with additional
correspondence to prove my point for the Division of
Insurance."
MR. GWALTNEY thanked the committee for its attention and the
opportunity to participate.
Number 1000
CHAIRMAN ROKEBERG confirmed Mr. Gwaltney had understood the
previous comments about removing the viatical settlement
instruments from HB 83 and addressing them with another piece of
legislation.
MR. GWALTNEY noted he had understood, commenting he thought that
was a step in the right direction. He reiterated that he was
certainly in favor of regulation.
CHAIRMAN ROKEBERG indicated Mr. Gwaltney had said he would stop
selling viaticals if enforcement or a new law was "retrospective,"
asking Mr. Gwaltney to explain his comment about withdrawing from
the business because of this regulatory threat.
Number 1061
MR. GWALTNEY replied he would be withdrawn because he was not
currently securities licensed and could not sell the product if it
became a securities product, noting for 20 years he had been
securities licensed, but had decided not to be a few years ago.
Mr. Gwaltney emphasized he wanted to comply with the law, whichever
way it went.
CHAIRMAN ROKEBERG stated the committee would take special note of
that in the record. He indicated, however, his concern was
regarding "retrospectivity" and if that happened Mr. Gwaltney had
said he would have to get out. The chairman confirmed it would be
helpful to Mr. Gwaltney if they "came up with a new regulatory
scheme in statute and regulation that excluded any prior
enforcement ...."
Number 1130
DAVID GWALTNEY testified next via teleconference from Anchorage.
He stated he was representing himself because his licensure for
viatical sales was a personal licensure. For the record, Mr. D.
Gwaltney stated he was the current compliance officer, manager, and
president of Gwaltney and Gwaltney, Incorporated, an
Anchorage-based insurance and accounting firm since 1984;
president, Alaska Independent Insurance Agents and Brokers
Association, Incorporated, the affiliate of the Independent
Insurance Agents of America (IIAA); a property casualty
representative of the state of Alaska Division of Insurance
continuing education advisory committee; member of the national
faculty for the Society of Certified Insurance Counselors (Society
of CIC), and numerous other faculties for continuing education and
boards of directorships. He concurred with Mr. Jack Gwaltney's
testimony. He stated, "In addition, I wish to argue the point of
logic as to the actual nature of a viatical settlement. As you
know, numerous state and federal courts have upheld that the
proceeds of life insurance policies are personal property. They
are originally sold as an estate asset or estate builder, and have
always been regulated by the Division of Insurance. Further,
proceeds are taxed as personal property, not as securities. [The]
best comparison to [a] mature life insurance policy may be your own
personal residence. Both the residence and the life insurance
proceeds are considered personal property, not securities. To sell
viaticals as securities would be the same as selling your house as
a security. At this point you may sell your house to whomever and
whenever you want. Selling any personal property as a security
provides undue complication." Mr. D. Gwaltney indicated that
concluded his remarks.
CHAIRMAN ROKEBERG indicated it was his or the committee's intention
to introduce new legislation regarding viaticals, then discussing
the legislation with the Gwaltneys and Mr. Elder.
Number 1271
MR. D. GWALTNEY asked if there would be a determination in the next
few days whether or not the "cease and desist" order would be
maintained.
CHAIRMAN ROKEBERG indicated he would let Mr. Elder speak to the
Gwaltneys' case.
Number 1289
MR. ELDER clarified that no order had been issued by the division.
He noted the Gwaltneys had been sent a letter and had voluntarily
agreed to provide information and cease marketing, and the division
appreciated that cooperation. Mr. Elder stated the Gwaltneys
needed to provide the requested information. After the information
was received, the division could make a determination whether it
was an investment contract covered by the Alaska Securities Act,
which would require either registration or exemption, or it was not
an investment contract. Mr. Elder stated the division would try to
make that determination rapidly.
CHAIRMAN ROKEBERG indicated, then, the division might determine the
product the Gwaltneys were selling was an exempt security, and not
an investment contract.
Number 1346
MR. ELDER replied that was not exactly correct, noting the
"investment contract" was one of the definitions of a security. He
said one possibility was the determination that it was investment
contract and therefore covered by the Alaska Securities Act,
requiring either registration or exemption. If this was found, the
division could then examine what had been done so far to see if the
transactions fit an exemption.
CHAIRMAN ROKEBERG confirmed that once the division saw the
materials requested from Mr. Gwaltney, the division would hopefully
have enough information to determine whether "it" [viaticals] would
be exempt or would require registration. The chairman commented
that if it was exempt, there might be a simple procedure, such as
a letter filing, that would meet the division's needs.
Number 1402
MR. ELDER stated he couldn't know that right now, but said that
even if it required registration the division would certainly work
with the Gwaltneys to effect the registration as quickly as
possible, noting they had done that in the past.
CHAIRMAN ROKEBERG asked if it was Mr. Elder's opinion that the
division had the ability to attempt to identify these viatical
instruments as securities.
MR. ELDER said that was their job.
CHAIRMAN ROKEBERG indicated that since viaticals were not directly
addressed in the statutes as covered, legal counsel could easily
theorize that the division did not have that authority.
Number 1440
MR. ELDER agreed, noting any decisions and actions taken by the
division were appealable, and that ultimately hearings or courts
decided whether or not the division had taken the proper action
initially.
CHAIRMAN ROKEBERG indicated he thought there seemed to be general
consensus that there needed to be regulation, but removing the
viatical settlement issue from HB 83 would help expedite its
progress. He thanked the Gwaltneys and indicated the committee
would be in contact with them.
Number 1505
MR. ELDER noted for Representative Harris that once the Gwaltneys
provided the requested information, the division could proceed with
making its determination.
Number 1523
MR. GWALTNEY [possibly Jack] stated they would get that information
out the first of the week, and had had full intentions to do so.
He indicated he appreciated any expeditious handling. He further
indicated if the determination was something they could not work
with, they, as well as others, would back away from that area.
CHAIRMAN ROKEBERG commented about not wanting to impede commerce in
the state per Mr. Gwaltneys' testimony. The chairman stated that
terminated the testimony and his intention would be to amend the
bill to remove references to viatical settlements, immediately
taking up other legislation on the viatical settlement issue. He
commented that in examining this issue they were really at the
country's cutting edge, referring to Maine's legislation as the
only state that had formally adopted such a statutory scheme.
Number 1681
REPRESENTATIVE CISSNA admitted her unfamiliarity with the area and
referred to page 22 [23], Section 10, line 6. She asked for
clarification on why it was important to grant an exception to
people who were not transacting business in Alaska and did not have
a place of business in the state.
Number 1733
MR. ELDER replied that agents of broker-dealers had to be
registered in each jurisdiction they conducted business in,
regardless of their office location. Currently there were 38,000
agents of broker-dealers registered in Alaska, noting sometimes
some of the larger firms did blanket registrations for all of their
agents in every state and that the registration fee was $75.
Different requirements through NSMIA apply to investment adviser
representatives. States can only register investment adviser
representatives of those large federal covered advisers if the
investment adviser representatives have a place of business in the
state and meet certain other criteria. NASAA [North American
Securities Administrators Association, Incorporated] and the
individual states disagreed, feeling the investment adviser
representatives should be registered in the jurisdiction. However,
Mr. Elder said they are bound by the federal law. He confirmed the
section Representative Cissna referred to was in compliance with
the federal law, even though it might not have been agreed with it.
Number 1862
REPRESENTATIVE CISSNA asked how many other sections of the bill had
exemptions, in compliance with the law, for people from outside the
state without a place of business in Alaska.
Number 1891
MR. ELDER said, if he understood the question correctly, that
investment adviser representatives would be the primary example -
those who were doing business in the state without an in-state
place of business and who therefore could not be registered.
Referring to the definition of a broker-dealer, he stated there was
also an exclusion from registration under certain circumstances for
broker-dealers without an in-state place of business: either
having only certain types of institutional clients or a limited
number of other transactions in the state.
REPRESENTATIVE CISSNA referred to Section 13, page 22, questioning
why they seemed to be opening up another market for Canadian
broker-dealers [Sec. 45.55.035. Limited Registration of Canadian
broker-dealers and agents.].
Number 1965
MR. ELDER noted this was a new section and would be considered
non-NSMIA, but its language was drafted by NASAA and supported by
the securities industry associations representing all of the
broker-dealers. He indicated they had received letters of support
from these organizations. This section was not opening up the
market to Canadian broker-dealers; it was allowing these
broker-dealers to provide investment services to their current
clients residing in Canada who might be temporarily in Alaska and
was a limited registration in that regard. It did not allow these
broker-dealers to compete for new Alaska business with a
broker-dealer registered in the state. Mr. Elder stated the
section was the registration, and was limited to those Canadian
broker-dealers whose home offices were in Canadian provinces that
provided the same rights to United States broker-dealers. These
Canadian broker-dealers would have to register in Alaska if they
wanted to compete with the other firms registered in Alaska like
Merrill Lynch and Company, Incorporated and Salomon Smith Barney
Incorporated.
Number 2070
CHAIRMAN ROKEBERG indicated he had had the same concern. He noted
a Canadian broker-dealer like Gruntal and Company, Incorporated
based in Toronto, Ontario was a major Wall Street player with
clients throughout the United States and was most likely registered
as a broker-dealer in Alaska. The chairman confirmed from Mr.
Elder that such a company would be doing business under Alaska
registration, not under this particular clause. He referred to
Section 45.55.027 [Section 45.55.027. Additional fraudulent,
dishonest, and unethical business practices of agents], subsection
(10) on page 21, line 3, in Section 9 of the bill: "(10) failing
to disclose a dual agency capacity; or". He stated he had asked
Mr. Elder to provide a definition of "dual agency" consistent with
NSMIA, NASAA, et cetera, to be inserted as a conceptual amendment
to make those standards of practice clear. He indicated this
definition was necessary because each profession had its own
understandings, and standards of conduct and practice, commenting
on the complexity of the meaning of dual agency in the real estate
field alone. Chairman Rokeberg noted he had a few more questions
and would like to have a few amendments passed, with the intention
of bringing a committee substitute before the committee on Monday
[February 22, 1999]. He confirmed he wished to move amendments
regarding viatical settlements and dual agency. The chairman
directed to Mr. Elder a question about Section 12, subsection (f),
on page 22 ["(f) A person may not be registered concurrently as an
agent of more than one broker-dealer or issuer. The administrator
may waive this restriction ....] He noted a broker-dealer usually
had multiple issues and questioned whether an issuer was a specific
entity within the statute.
Number 2263
MR. ELDER explained there were two kinds of agents: 1) agents
representing broker-dealers, 2) agents representing issuers. The
issuer is the entity issuing the stock or bond; agents of issuers
sell that stock or bond and represent that issuer. Unless this
restriction was waived, agents of broker-dealers could only
represent one broker-dealer and agents of issuers could represent
only one issuer. Mr. Elder gave the example of IBM [International
Business Machines Corporation] selling stock through broker-dealers
to the public, noting those [broker-dealer] agents were acting
representatives of their broker dealer, not IBM. Regarding an
agent for an issuer, Mr. Elder gave the hypothetical example of a
local brewery choosing to sell some stock through someone, not a
broker-dealer, who was employed by the brewery to do this and who
was paid through commission. He clarified this person was usually
already an employee of the company, noting there was already an
exemption for officers and directors, who were also usually not
paid a commission when they made these sales. However, he
indicated someone in a company's finance section who did this and
was paid a commission should be registered as an agent of an
issuer. Mr. Elder commented there were approximately 80 agents of
issuers currently registered.
Number 2408
CHAIRMAN ROKEBERG confirmed the language in the legislation "a
person from Canada who is" did not require that person to be a
Canadian citizen. Referring to page 25, line 23 ["The application
must ... contain whatever information the administrator by
regulation may require ..."], he noted this was a change to an
existing statute and asked if the regulations were already in
place.
Number 2442
MR. ELDER answered in the affirmative, commenting they would also
revise their regulations after the legislation's passage. He noted
they were 99 percent done with the regulation writing, but there
were some sections which would require further work. He referred
to the current 123-page single-sided version of the regulations,
noting both the deleted and new language would be retained.
TAPE 99-10, SIDE B
Number 0001
CHAIRMAN ROKEBERG referred to page 26 [from tape log notes], lines
27 and 28 [26 through 29], "(d) A registered broker-dealer, state
investment adviser, or a federal covered adviser who has filed
notice under this chapter may file an application for registration
or notice filing, as applicable, of a successor for the unexpired
portion of the year regardless of whether the successor is then in
existence." He questioned that meaning.
Number 0034
MR. ELDER replied it was usually for a situation like a merger when
a successor was created. First, the broker-dealer, state
investment adviser or federal covered adviser would change, then
bring along the various employees and representatives. He
clarified for the chairman that the successor was created, the
businesses become the successor, and the registered agents
transferred to that new entity. The reason this section was
desirable was to avoid requiring the involved parties to start over
"from scratch" in terms of registration when a successor was
created from a previously registered or noticed entity. He
indicated the creation of the successor was usually just a
perfunctory change of name and sometimes address.
Number 0101
CHAIRMAN ROKEBERG referred to page 27, line 27, "(g) The
administrator may permit initial and renewal registration ...",
questioning the use of the discretionary "may" rather than the
prescriptive "shall" in the existing statute.
MR. ELDER noted one would never want to say that the state "shall"
register someone if that person was not qualified.
CHAIRMAN ROKEBERG questioned where the three-year record retention
requirement mentioned on page 30, line 2 and referred to in line 15
came from [lines 2 and 3, from subsection (e): "... All required
records shall be preserved for three years unless the administrator
by regulation prescribes otherwise."].
Number 0160
MR. ELDER stated those were their current requirements and
confirmed that length of retention worked for their investigations.
He confirmed there was a three-year statute of limitations for
civil actions although he thought criminal actions went back five
years. He indicated this three-year requirement could be changed
by regulation if it was ever found to be a problem. Mr. Elder
noted the chairman's reference to line 15 in subsection (h) ["(h)
A state investment adviser that has its principal place of business
in a state other than this state and the investment adviser
representatives of that state investment adviser are exempt from
the requirements of (e) of this section if the state investment
adviser is registered as an investment adviser in the state where
the state investment adviser has its principal place of business
and is in compliance with that state's requirements relating to
accounts and records."]. That was a NSMIA requirement; NSMIA said
the records and financial requirements of state investment advisers
would be determined only by the state in which the state investment
advisers are domiciled. Other states could not impose greater
restrictions.
Number 0265
CHAIRMAN ROKEBERG referred to pages 33 and 34, subsection (5), "(5)
the administrator shall consider that a state [AN] investment
adviser is not necessarily qualified solely on the basis of
experience as a broker-dealer or agent; if [WHEN] the administrator
finds that an applicant for initial or renewal registration as a
broker-dealer is not qualified as a state [AN] investment adviser,
the administrator may by order condition the applicant's
registration as a broker-dealer upon the applicant's not
transacting business in this state as a state [AN] investment
adviser;". He questioned that one could become a broker-dealer and
not be a state investment adviser if not proven to be qualified.
He confirmed from Mr. Elder that in current law one could sell
stocks without being a financial planner.
MR. ELDER clarified that section was saying that being a
broker-dealer was not automatic qualification for being an
investment adviser, indicating in this case it had to be limited to
state investment adviser. He confirmed this was to make sure the
person in question had the background to be an investment adviser.
Mr. Elder noted most of the broker-dealers were large enough so
that their associated advisers were federal covered advisers, not
state investment advisers. Therefore this did not really apply to
anyone and he thought it had never been acted on.
Number 0341
CHAIRMAN ROKEBERG referred to the reference on page 36 to the
United States Securities and Exchange Commission's Form D,
indicating it was unusual to mention a specific form name in
statutory construction. He questioned how long the form had been
in existence.
Number 0359
MR. ELDER answered he did not know exactly, but said a long time,
as long as Regulation D had been in existence. NSMIA requires that
states can only require what is filed with the SEC for Regulation
D 506 filings which are considered covered securities, and Form D
is what is filed with the SEC. He assured the chairman it was
unlikely Form D would cease to exist.
CHAIRMAN ROKEBERG referred to page 36, lines 27 and 28 [and line
29], "(B) the issuer and predecessor during the past three fiscal
years have had average net earnings, determined in accordance with
generally accepted accounting practices", questioning the inclusion
of "GAP" principals and average net earnings.
Number 0453
MR. ELDER replied several places in the "Securities Act" required
"GAP" accounting. He clarified the "GAP" would be for the earnings
and then the net earnings would be averaged over three years.
CHAIRMAN ROKEBERG referred to page 38, in Section 37, regarding a
person filing a registration statement or a notice filing, asking
what the notice filing fee was.
Number 0507
MR. ELDER replied the fee would be set by regulation, noting in the
past they just had a registration fee, and now they were required
to have both a notice filing fee and a registration fee. He stated
both the current fees were .1 percent of the amount being either
registered or noticed, with a minimum of $100 and a maximum of
$3000. Mr. Elder replied to the chairman that he didn't know why
there was a maximum amount but indicated he would be surprised if
anyone ever sold to that amount.
CHAIRMAN ROKEBERG asked for clarification regarding the automatic
extension on page 39 [lines 19 through 24: "The administrator may
establish a different expiration date for purposes of coordination
with a national registration or notice filing system. The
administrator may by regulation provide for an automatic extension
for one additional year of the effective date for notice filings
under AS 45.55.075 if the extended expiration date is set at the
same time the notice filing is made effective and the notice filing
fee reflects the extension."].
Number 0586
MR. ELDER agreed that the extension was requested and paid for in
the initial filing, explaining it was for simplification. Standard
practice was for orders of effectiveness to be for a one-year
period but an additional year extension was allowed and a slight
fee discount given at the time of filing. For example, currently
mutual funds have two-year notices and the division anticipates the
industry would want to do that, but, especially with the change to
a flat fee, it was also possible that a new fund would be
registered for one year "to test the waters." Mr. Elder responded
to the chairman's question regarding why the bank holding company
equities, on page 43, had to be treated differently. He stated
that entire section was making some updates to the exemption of
their statute, and he indicated these changes were updates in
response to changes in the "Uniform Securities Act."
CHAIRMAN ROKEBERG noted the .900 sections of chapters in the Alaska
Statutes contained the exemptions. He confirmed the exemption on
page 44 was an exemption for real estate obligations.
Number 0759
MR. ELDER referred to previous testimony regarding the sale of a
person's home [in relation to viatical settlements], commenting the
committee would note the exemption from the Alaska Securities Act
was for selling a home with the entire mortgage or deed of trust,
bonds and other evidence of indebtedness, as a unit. The exemption
would not cover the sale if a person sold it in fractional shares
or interests; the person would probably receive a letter from the
division.
CHAIRMAN ROKEBERG indicated that commercial and residential
mortgages are now "securitized" and fractionalized with CMOs
[collateralized mortgage obligations] and other sophisticated
securities instruments. He asked how that section worked with, for
example, a CMO.
Number 0837
MR. ELDER responded they would not qualify for this exemption, not
if they were selling interests in a pool. He indicated they would
be required to register, unless they fit under another exemption,
for example, guaranteed by some political subdivision or similar.
Mr. Elder confirmed limited partnerships on page 45 were included
in the definition of a security. In response to the chairman's
discussion of the 25-person limit and its relevance to the
formation of real estate syndicates in Alaska, Mr. Elder noted he
did not know why 25 had been chosen for Alaska. As far as private
offerings, 10 or 25 was not unusual for other states. 25 may have
been selected because it had something to do with the number of
persons in a partnership.
CHAIRMAN ROKEBERG noted with 25 people each contributing $100,000,
$2.5 million could be raised, critical mass in terms of a
syndication or investment.
Number 0941
MR. ELDER stated the dollar limit was the total dollar limit, not
the individual limit; currently $100,000 maximum for AS
45.55.900(b)(5)(A) and $500,00 maximum for AS 45.55.900(b)(5)(B).
He noted they were proposing to do away with those limits,
confirming an unlimited amount of money could be raised with
limited numbers of people. Mr. Elder stated they thought it was
pro-commerce. He emphasized these were private offerings in the
(b)(5) section, not public solicitations.
CHAIRMAN ROKEBERG asked how this worked regarding notification.
Number 1054
MR. ELDER explained some exemptions in 45.55.900 were
self-executing, not requiring notice, and others did require a
notice to the state. The current notice format was a letter to the
state giving notice plus a $40 fee. However, the division was
developing simple forms that could be downloaded from the Internet
for standardization and faster processing.
CHAIRMAN ROKEBERG asked why subsection (v), "(v) [(vi)] the issuer
obtains a signed agreement from the buyer acknowledging that the
buyer is buying for investment purposes and that the securities
will not be resold without registration under this chapter;", had
been excluded from subsection (b)(5)(C) on page 46, "(C) to no more
than 10 persons who are to receive the initial issue of shares of
a nonpublicly traded corporation, limited liability company,
limited partnership, or limited liability partnership if the
requirements of (B)(ii) - (iv) and (vi) of this paragraph are
met;".
Number 1177
MR. ELDER mentioned the committee's past discussion on HB 486,
noting the section in question was part of the amendments to
various titles supported by those attempting to improve Alaska's
standing for trust business. He indicated it is a limited offering
and technically those are securities; this is to provide them an
exemption from registration. However, the division suggested that
some of AS 45.55.900(b)(5)(B)'s requirements be maintained for the
public good, while still facilitating the trust business. He noted
this was acceptable to those promoting these amendments. Mr. Elder
noted (b)(5)(B)(i), "(i) a [NO] commission or other remuneration in
not paid or given directly or indirectly for soliciting a
prospective buyer in this state;", was also excluded because some
of the trust beneficiaries are in other states. Regarding (v), he
commented it was not easy to get a signed agreement and a signed
agreement did not have any real meaning in this case. Those kinds
of interests - beneficiary of trust proceeds, et cetera - were
generally not something being bought. He indicated they thought
the inclusions of (ii) through (iv), and (vi), were sufficient to
provide public protection.
CHAIRMAN ROKEBERG asked what a promoter was, noting discussion the
previous year.
Number 1327
MR. ELDER stated it was currently defined in regulation and that
definition would be updated in regulation. A promoter is
essentially anyone who causes a business to be started and that
stock to be issued, often a controlling figure and often receiving
the first distribution of stock. Currently the "isolated nonissuer
transaction" language in AS 45.55.900(b)(9) has caused some
confusion. Mr. Elder indicated the division has always maintained
that when someone is a controlling person there is no difference
between that person and a corporation - especially in some cases
where the person may have 80 percent of the shares - and that
person cannot use the exemption in (b)(9) to distribute. He noted
would be particularly important in light of the new (b)(5)(C)
exemption; if the restriction on promoters was not clear in (b)(9),
those people could use (b)(5)(C) to distribute to the public. This
would also be a public distribution that had never had a
registration or disclosure.
CHAIRMAN ROKEBERG referred to the deletions from the current law of
subsections (b)(13)(A) and (b)(13)(B), mentioning competing.
[deleted language: "[,IF] (A) {NO COMMISSION OR OTHER
REMUNERATION, OTHER THAN A STANDBY COMMISSION IS PAID OR GIVEN
DIRECTLY OR INDIRECTLY FOR SOLICITING A SECURITY HOLDER IN THIS
STATE; AND (B) THE ISSUER FILES A NOTICE IN THE FORM SPECIFIED BY
THE ADMINISTRATOR NOT LESS THAN 30 DAYS BEFORE MAKING THE OFFER];"]
Number 1456
MR. ELDER answered in the affirmative, noting they didn't receive
very many of these because they were often covered by other
exemptions, or were covered securities and therefore not part of
the filing requirements. This deletion would make the few the
division still received self-executing exemptions, eliminating the
notice requirement. In response to the chairman's question about
the new subsection (b)(17) on page 50, Mr. Elder noted (17) was a
replacement for the current subsection (b)(10) which was always
referred to as a manual exemption: certain transactions are
exempted when certain information is out there. He commented it
was very dated and required the division to adopt regulations
naming specific publications the information was found in. NASAA
developed this replacement language working with the securities
industry association. If the information is available for SEC
download, that is now sufficient.
CHAIRMAN ROKEBERG questioned why unit investment trusts, appearing
on page 50, line 13 and page 51, line 22, were involved.
Number 1678
MR. ELDER noted NASAA had drafted the language and suggested it was
in order to be all-inclusive. He emphasized these were non-issuer
transactions, secondary transactions, not the initial distribution.
Recognizing that unit investment trusts are very common, he noted
it was including them, not excluding them, and this was an
exemption for secondary transactions, like the current (b)(10).
CHAIRMAN ROKEBERG asked what the manuals mentioned in subsection
(D), page 50, line 27 had to do with this
Number 1754
MR. ELDER clarified there were certain manuals, as mentioned in
(b)(10), which contain information on earnings, balance sheet
statements, et cetera. Secondary transactions have been mainly
exempt because the information is in one of those manuals, but the
manuals have had to be specifically named, which has been a
problem. Mr. Elder indicated (b)(17)(D) recognizes that the
information may be in one of those manuals but it also may be in
SEC filings and available through EDGAR [Electronic Data Gathering,
Analysis, and Retrieval system], the SEC reporting system.
CHAIRMAN ROKEBERG questioned whether subsection (18) on page 51 was
creating a new type of security.
Number 1848
MR. ELDER stated it was not a new type of security, it was a new
type of exemption. The language had been drafted by NASAA and this
subsection was called the accredited investor exemption.
Essentially it provides for the ability of issuers that meet the
criteria to simply send the division a notice after a transaction
has been made, as opposed to advance registration. The purpose of
this was to exempt an issuer from registration when the issuer was
issuing in order to obtain expansion money and was willing to limit
its solicitation to investors who meet the SEC's accredited
investor definition. Mr. Elder said this accredited investor
exemption and the Internet offer exemption, in (g) on page 55, line
10, would allow Alaska issuers to participate in the Small Business
Administration's (SBA) ACE-Net [Angel Capital Electronic Network]
program, an electronic matching service. Issuers meeting the
criteria in this exemption and investors meeting the accredited
investor definition could both get listed on ACE-Net, review each
other and possibly make agreements. If something was done, Mr.
Elder said the Alaska businesses would send the division a notice
to that effect. He referred to page 54, line 26, (I), "(I) the
issuer shall file a notice 15 days after the first sale in this
state;". If there are no sales, no notices are filed.
CHAIRMAN ROKEBERG referred to Section 47 of the bill, on page 55,
noting the language in subsection (g) seemed to say securities
could not be offered to Alaskans, only to those out of state.
Number 2099
MR. ELDER noted this language was drafted by NASAA for the "Uniform
Securities Act" in recognition that the Internet was not covered in
most states' past statutes. Before the Internet, one could not
make an offer of a security unless it was registered or exempt.
However, with the creation of a website, "hits" can be received
from anyone and the technical argument can be made that the holder
of the website, typically an issuer, has made an offer. If the
holder is not registered in a state where a hit was received from,
the holder has just violated that state's securities Act. He
explained this exemption allows the website as long the states
where the holder is registered, or not registered, are clearly
noted, keeping the holder from being in violation of the securities
Act from the beginning. Mr. Elder indicated sales could not be
made until the seller was registered in the buyer's state.
Number 2396
CHAIRMAN ROKEBERG indicated the committee was nearing the close of
the meeting but was waiting for a quorum to address amendments on
viatical settlements and dual agency. He asked Mr. Elder about the
change from 6 percent to 8 percent, "or the fixed rate, 'cause it
was higher?" [No bill section mentioned.]
Number 2470
MR. ELDER stated, "The idea there is that we've been at six for a
long time and we thought that in fact -- this is dealing with
recision offers, and so we think ... it ought to be somewhat of a
punitive rate, so it should be something higher than the..."
[TESTIMONY INTERRUPTED BY TAPE CHANGE]
TAPE 99-11, SIDE B
Number 0001
CHAIRMAN ROKEBERG referred to page 69, Sections 74 to 77, which
includes a substantial amount of repealers. He indicated the need
for an explanation of those repealers.
Number 0088
MR. ELDER said that inquiry regarding Sections 74 to 76 would best
be directed to Terry Bannister, Legislative Legal Counsel,
Legislative Legal and Research Services, Legislative Affairs
Agency. Mr. Elder noted the repealers came from legislative
counsel.
CHAIRMAN ROKEBERG referred to Sections 75 and 76.
MR. ELDER said, "And on Section 72, those repealers are simply
because there -- like I know that 996 [AS 45.55.990(6)], for
instance, is the old definition of investment adviser. And
020(b)[AS 45.55020(b)] I'd have to look."
CHAIRMAN ROKEBERG suggested that Mr. Elder's earlier reference to
legislative counsel should be to legislative legal because, "we
have a Legislative Council as a group." There being no further
questions for Mr. Elder, Chairman Rokeberg said he would entertain
some conceptual amendments to HB 83 regarding the removal of all
references to "viatical settlements" in Version D.
Number 0256
REPRESENTATIVE HALCRO moved that all references to "viatical
settlements" be deleted, as a conceptual amendment. There being no
objection, the conceptual amendment was adopted.
Number 0312
CHAIRMAN ROKEBERG indicated the need for a conceptual amendment to
define "dual agency."
Number 0333
REPRESENTATIVE HALCRO moved that a conceptual amendment defining
"dual agency" be adopted. There being no objection, the conceptual
amendment was adopted.
Number 0359
REPRESENTATIVE CISSNA indicated a letter from the National Planning
Corporation in the bill packet asked for the definition of
"disclosure" to be included in HB 83 for the average consumer.
REPRESENTATIVE HARRIS asked if the definition of "disclosure" was
in HB 83.
Number 0418
MR. ELDER stated that definition is not included in HB 83 but they
had noted that suggestion. Including that disclosure definition is
probably not necessary because "disclosure" is simply telling
someone something either in writing or verbally. He stated the
division would not object to creating a definition of "disclosure."
CHAIRMAN ROKEBERG asked what "disclosure" would mean in the context
of HB 83.
Number 0542
MR. ELDER reiterated his former definition of "disclosure" which he
thought would be a simple dictionary definition that does not need
to be defined in the bill. In response to Chairman Rokeberg, Mr.
Elder did not have any corrections or additions to HB 83, noting
they were very pleased with the drafting. Mr. Elder noted that his
staff had found a definition for "dual agency" in "SEC Rule
10-b-10." He agreed to provide that information to the committee.
Mr. Elder asked if the committee desired a definition for
unreasonable hours for telephone.
CHAIRMAN ROKEBERG asked if the unreasonable hours for telephone was
included in the conduct rules of the National Association of
Securities Dealers, Incorporated (NASD).
MR. ELDER said that the specific rule citation under NASD could be
included.
Number 0639
CHAIRMAN ROKEBERG referred to page 17, line 23 and asked what
"conducting business by telephone at unreasonable times" meant.
MR. ELDER suggested inserting the following language: "in
violation of Rule 22-11 of the National Association of Securities
Dealers." He indicated that rule determines the time for
conducting business.
CHAIRMAN ROKEBERG suggested the following conceptual amendment:
insert "as defined by the Conduct Rules of the National Association
of Securities Dealers, Inc." at the end of line 23 on page 17.
MR. ELDER said that would be fine.
Number 0713
REPRESENTATIVE HARRIS asked if that would be duplication.
CHAIRMAN ROKEBERG said he had the same thought since subsection
(28) addressed the conduct rules. Chairman Rokeberg concluded that
an amendment would not be necessary. [HB 83 WAS HELD OVER]
ADJOURNMENT
Number 0755
CHAIRMAN ROKEBERG adjourned the House Labor and Commerce Standing
Committee meeting at 5:10 p.m.
| Document Name | Date/Time | Subjects |
|---|