Legislature(1999 - 2000)
04/19/1999 03:23 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HOUSE LABOR AND COMMERCE STANDING COMMITTEE April 19, 1999 3:23 p.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative Jerry Sanders Representative Lisa Murkowski Representative John Harris Representative Tom Brice Representative Sharon Cissna MEMBERS ABSENT Representative Andrew Halcro, Vice Chairman COMMITTEE CALENDAR HOUSE BILL NO. 110 "An Act relating to the sale, offer to sell, and labeling of fluid milk, meat, and meat products." - HEARD AND HELD * HOUSE BILL NO. 190 "An Act relating to viatical settlement contracts." - HEARD AND HELD (* First public hearing) PREVIOUS ACTION BILL: HB 110 SHORT TITLE: SALE/LABELING OF MEAT/MILK PRODUCTS SPONSOR(S): REPRESENTATIVES(S) HARRIS, Dyson Jrn-Date Jrn-Page Action 2/24/99 300 (H) READ THE FIRST TIME - REFERRAL(S) 2/24/99 300 (H) L&C, JUD 3/10/99 418 (H) COSPONSOR(S): DYSON 3/15/99 (H) L&C AT 3:15 PM CAPITOL 17 3/15/99 (H) HEARD AND HELD 3/15/99 (H) MINUTE(L&C) 4/19/99 (H) L&C AT 3:15 PM CAPITOL 17 BILL: HB 190 SHORT TITLE: VIATICAL SETTLEMENTS SPONSOR(S): LABOR & COMMERCE Jrn-Date Jrn-Page Action 4/13/99 794 (H) READ THE FIRST TIME - REFERRAL(S) 4/13/99 794 (H) L&C, JUD 4/19/99 (H) L&C AT 3:15 PM CAPITOL 17 WITNESS REGISTER PETE FELLMAN, Researcher for Representative John Harris Alaska State Legislature Capitol Building, Room 110 Juneau, Alaska 99801 Telephone: (907) 465-4859 POSITION STATEMENT: Explained changes in the proposed Version H committee substitute for HB 110. JANICE ADAIR, Director Division of Environmental Health Department of Environmental Conservation 555 Cordova Street Anchorage, Alaska 99501 Telephone: (907) 269-7644 POSITION STATEMENT: Testified on HB 110. BERT GORE, DVM, State Veterinarian Animal Industries Division of Environmental Health Department of Environmental Conservation 500 South Alaska Street, Suite A Palmer, Alaska 99645-6399 Telephone: (907) 745-3236 POSITION STATEMENT: Answered questions on HB 110. DON LINTELMAN Northern Lights Dairy HC 60 Box 3300 Delta Junction, Alaska 99737 Telephone: (907) 895-4824 POSITION STATEMENT: Testified in support of HB 110. ART GRISWOLD Sleepy Hollow Farm HC60 Box 4493 Delta Junction, Alaska 99737 Telephone: (907) 895-6248 POSITION STATEMENT: Testified in support of HB 110, provided suggestions. MARLA McPHERSON Cook Inlet Keeper P.O. Box 3269 Homer, Alaska 99603 Telephone: (907) 235-4068 POSITION STATEMENT: Testified in support of HB 110. TERRY ELDER, Director Division of Banking, Securities, & Corporations Department of Commerce & Economic Development PO Box 110807 Juneau, Alaska 99811-0907 Telephone: (907) 465-2521 POSITION STATEMENT: Presented CSHB 190. DANA CASHEN Accelerated Benefits Corporation; Co-Chair, Legislative Committee, National Viatical Association 1501 Broadway, Suite 312 New York, New York 10036 Telephone: (800) 894-3985 POSITION STATEMENT: Discussed Florida's viatical legislation. DOUG HEAD, President Viatical Association of America 1200 19th Street Northwest, Suite 300 Washington, D.C. 20036 Telephone: (907) (407) 898-4203 POSITION STATEMENT: Discussed concerns with HB 190. JACK GWALTNEY, General Agent Future First Financial Group Gwaltney & Gwaltney, Incorporated 701 Sesame Street, Suite 200 Anchorage, Alaska 99503-6641 Telephone: (907) 561-7468 POSITION STATEMENT: Offered to work with the committee on this issue. ACTION NARRATIVE TAPE 99-41, SIDE A Number 0001 CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce Standing Committee meeting to order at 3:23 p.m. Members present at the call to order were Representatives Rokeberg, Sanders, Harris, Brice and Cissna. Representative Murkowski arrived at 3:26 p.m. Representative Halcro was not present. HB 110 - SALE/LABELING OF MEAT/MILK PRODUCTS Number 0099 CHAIRMAN ROKEBERG announced the committee's first order of business would be HB 110, "An Act relating to the sale, offer to sell, and labeling of fluid milk, meat, and meat products." The bill had been heard previously by the committee. [Acronyms for the hormones are those used by the Food and Drug Administration (FDA).] REPRESENTATIVE HARRIS noted, as sponsor of HB 110, that there was a proposed committee substitute (CS), Version H. Number 0142 REPRESENTATIVE SANDERS made a motion to adopt Version H [1-LS0408\H, Bannister, 3/26/99] as the work draft. There being no objection, Version H was before the committee. Number 0168 REPRESENTATIVE HARRIS informed members that much in the original bill was removed, including shelf life and other items that were fairly controversial for certain people. This bill provides dairy farmers the ability to label their milk, cream or other byproducts as being free from various hormones, and it provides for a penalty for falsely labeling products in that regard. He asked Mr. Fellman to give a more in-depth explanation. Number 0298 PETE FELLMAN, Researcher for Representative John Harris, Alaska State Legislature came forward. He indicated that in preparing Version H, they looked at the 26 states with statutes dealing with rbST [recombinant bovine somatotropin] and rBGH [recombinant bovine growth hormone]. Noting that there are discussions of those synthetic hormones in the packets, Mr. Fellman explained that BGH is a naturally occurring hormone. The "r" in rBGH or rbST indicates manufacture in a laboratory to inject into cattle. MR. FELLMAN explained that Minnesota's and Wisconsin's laws accomplished what the sponsor was trying to do in the original bill. Therefore, HB 110 is patterned after Wisconsin's law for the affidavit, which can be filled out to cover any concerns of the milk processor, and after Minnesota's law for labeling that meets the interim federal guideline. Mr. Fellman indicated that although no federal law discusses labeling for bST or rbST, there is a federal guideline, used by those 26 states to set forth regulations for labeling a product as being free from rBGH or rbST, and used by the sponsor for the clarifying changes to the bill. Number 0538 REPRESENTATIVE MURKOWSKI referred to page 4, which sets out the affidavit itself. She noted that subparagraph (A) of the affidavit says "that no animals on the above farm are currently being treated" and that no animals have received the treatments within the past 30 days. She asked why it doesn't specify cows, and whether other animals possibly would be treated with the hormone. MR. FELLMAN replied that the BGH is bovine growth hormone, and "bovine" are just cattle. REPRESENTATIVE MURKOWSKI asked for confirmation that the hormone couldn't be used in a goat to produce more milk, for example. MR. FELLMAN confirmed that, saying it is species-specific and therefore needs no further definition. Number 0625 REPRESENTATIVE BRICE referred to the federal interim guidelines for labeling. He pointed out that "interim" suggests there are other guidelines or regulations that have not yet been adopted. MR. FELLMAN said he had checked with the federal government, and that is not so in this case. They had set up the guidelines in 1992, to his belief, and have just decided to let them stand as they are. Number 0670 REPRESENTATIVE SANDERS asked about enforcement. MR. FELLMAN replied that the reason for the affidavit is so people can be held accountable, to ensure honesty in labeling. REPRESENTATIVE SANDERS referred to the zero fiscal notes from the Department of Natural Resources' Division of Agriculture, and from the Department of Environmental Conservation (DEC). He asked whether there is no charge for the enforcement. MR. FELLMAN noted that it is a misdemeanor. He suggested perhaps enforcement for other labeling laws such as the "organic labeling law" and the "Alaska-grown label" might also apply. Number 0763 REPRESENTATIVE HARRIS said the Division of Agriculture doesn't anticipate any fiscal impact, but the Department of Law, if they have to, would receive some fiscal impact in enforcing this through its normal enforcement of misdemeanor violations. REPRESENTATIVE SANDERS indicated the bill may have to go to the House Finance Standing Committee if there is a fiscal note. Number 0825 REPRESENTATIVE HARRIS asked Mr. Fellman to explain what objections might come from large dairies outside of Alaska, where the majority of Alaska's milk comes from. MR. FELLMAN answered, "We haven't had any objections to the CS. Originally, the objections we were getting from out of state were because of the 18-day labeling period and the high-temperature pasteurization issue, which we removed. We haven't had any calls that have objected to the labeling, as laid out by the interim guidelines. The impact on the state will be such that we can create niche markets, because we can go in with our milk and say, ... 'We don't have hormones,' and that will increase the return to the state, through the lending programs and things that we already have invested in, in Alaskan agriculture." Mr. Fellman said this really is a consumer bill. It gives the consumer a choice, and it also creates a niche market for the small farmer. He believed that Alaska is the last stronghold of the family farm and needs the state's backing in order to have these niche markets. Number 0825 REPRESENTATIVE HARRIS asked if that will affect Matanuska Maid. MR. FELLMAN said yes, it probably will. As known from the audit and information that the legislature has obtained from Matanuska Maid, the dairy imports about 60 percent of its milk. If it so choses, however, it could separate the milk from any dairyman who decided to sign the affidavit, and label that particular milk as being rbGH-free. Number 0975 REPRESENTATIVE MURKOWSKI asked if any affidavit process is required to label meat or meat products as hormone-free. MR. FELLMAN answered, "We do not have an affidavit process. We got very little response from the industry on that. It wasn't an issue that was taken up by the federal government, either." He noted that the federal government is going to adopt some regulations on organic meat, however. Number 1025 REPRESENTATIVE MURKOWSKI asked why they are making such a fuss over milk as a great niche product because it is hormone-free, yet there is no similar standard for meat. MR. FELLMAN answered that it is a consumer issue. The federal government felt there was a need for the interim guideline because of consumer interest in whether there are synthetic hormones in their milk. In contrast, he is not aware of any guidelines revolving around meat. He added, "I know that there is an organic meat market there, and that they're working on regulations on a federal standpoint, which we anticipate will be coming down pretty soon." Number 1122 REPRESENTATIVE MURKOWSKI expressed concern that anybody who artificially injects a hormone, whether for milk or a meat product, will be guilty of a Class A misdemeanor if he or she doesn't comply with these regulations. However, the same accountability process isn't set up for meat as for milk, and the reasons for the inconsistencies aren't entirely clear. She said perhaps she is missing something, or perhaps the meat needs to be addressed in a separate bill. MR. FELLMAN responded that he understands the concern. He himself is not a beef-producer, and they had received no input on it. It may be appropriate to pull meat out of the bill, he added. REPRESENTATIVE MURKOWSKI suggested the alternative of having meat subject to the same form of written affidavit as required for milk. MR. FELLMAN said that is a good point. Number 1210 REPRESENTATIVE BRICE asked why it is a Class A misdemeanor, rather than a fine or violation. MR. FELLMAN indicated that was a suggestion from legislative counsel. He hadn't investigated Minnesota's laws to see what they do, although he could find out, he added. REPRESENTATIVE BRICE stated his understanding that a Class A misdemeanor can be pretty stiff. CHAIRMAN ROKEBERG suggested it puts this on the same plane as the enforcement for occupational licensing. Number 1265 REPRESENTATIVE HARRIS asked how many other states have laws similar to, or identical to, this. MR. FELLMAN replied that 26 other states have laws similar to this. REPRESENTATIVE HARRIS asked whether research shows the penalties to be misdemeanors. MR. FELLMAN said he hadn't checked. Number 1289 CHAIRMAN ROKEBERG noted that testimony by Catherine Reardon of the Division of Occupational Licensing had been that she couldn't recall, in her career, ever having been in an occupational licensing enforcement procedure where there were criminal charges brought forward. Number 1321 REPRESENTATIVE MURKOWSKI asked whether the states with similar laws combine the meat and the milk. MR. FELLMAN said no. Number 1329 CHAIRMAN ROKEBERG asked what the "milk versus meat state count" is. MR. FELLMAN said he doesn't know, and that he hadn't done much research about meat. One producer in Delta Junction, who also raises elk, was interested in the [meat] label. But as far as any real response otherwise, Mr. Fellman said he hadn't had any. CHAIRMAN ROKEBERG asked whether Mr. Fellman had communicated with the state-owned "McKinley Meat Packing Plant" in Palmer. MR. FELLMAN said he had talked to the director of the Division of Agriculture, but had no response or anything to point him in that direction. "Everything really focused on milk," he added. Number 1377 REPRESENTATIVE CISSNA expressed her understanding that no group is pushing for labeling of meat products. MR. FELLMAN replied that a man in Kodiak who has beef cattle had called, as had a man in Delta Junction; both thought it was a good issue. However, Mr. Fellman could find no model legislation or guidelines by other states where meat was targeted as being hormone-free. He suggested this may be new ground. Number 1413 REPRESENTATIVE CISSNA asked why meat is included in the bill, then. MR. FELLMAN indicated the response was that it is reasonable that, if there is a concern about hormones in milk, perhaps a niche market can be created for hormone-free meat. Number 1457 JANICE ADAIR, Director, Division of Environmental Health, Department of Environmental Conservation, came forward. She informed members that it is her agency that would enforce this labeling law. She expressed appreciation for the changes that were made. The only thing she would want to check out with the FDA is on page 3, she said, starting at the end of line 2, where it states that milk products offered for wholesale or retail sale in the state may not be required to contain any further label information. MS. ADAIR pointed out that the federal guideline actually gives other information that the FDA believes should be on the label, although she isn't sure how tightly they hold to that. The inference is that the label shouldn't be misleading, she told members, and that it should be in proper context to avoid any misleading implication. Proper context could be achieved in a number of ways. For example, the statement, "From cows not treated with rbST," could be accompanied by the statement, "No significant difference has been shown between milk derived from rbST-treated and non-rbST-treated cows." Ms. Adair noted, "If FDA requires a qualifying statement like that, and we're not allowed to put that on there, then we could preclude our two dairies from selling their milk to the federal government and to schools who use federal funds to buy milk, and I don't think we'd want to do that. So, I would just want to run this by FDA, to make sure that the label - ... because all you'll get on the label is what's in this bill - is going to be satisfactory to them." MS. ADAIR said she has the same concerns mentioned by Representative Murkowski regarding the meat. She explained, "Since we can't test the meat to determine whether or not it's been treated, and we don't have the benefit of the affidavit, I don't know how we would ever enforce or allow someone to -- you know, you want them to be in best stead to protect themselves from a claim that they have treated their meat, if they haven't. So, we would recommend either something similar to the milk or that the meat be deleted from the bill. I suspect that meat that hasn't been treated gets sold as "organic" instead of "hormone-free" or "not from rbST-treated cows" and would be handled under the organic rules that USDA [United States Department of Agriculture] has been working on for quite some time." Number 1598 REPRESENTATIVE MURKOWSKI inquired as to what the difference is to the consumer in the labels "organic" and "non-synthetic-hormone." MS. ADAIR replied that the USDA has been working on organic regulations for quite some time, grappling with that exact issue of at what point something becomes non-organic. She pointed out that synthetic hormones typically are considered outside the realm of organic, and she would be surprised if they were included. However, irradiation will be considered organic, as of their last proposal, which has caused a lot of angst; that is one reason why the USDA hasn't yet finalized those rules. REPRESENTATIVE SANDERS asked whether there is no charge for enforcement. MS. ADAIR explained, "We did put a zero fiscal note on the prior bill, because we couldn't figure out how to do any enforcement. And in the testimony on the bill last time, Representative Rokeberg did point out that we probably should have indicated that, when in fact we didn't. I don't know how many farmers might be interested in this, how many records we might find ourselves reviewing. And I probably will talk with our state vet when he gets back in the office tomorrow, to see if he's got some clue. I wouldn't imagine it would be a huge amount, but certainly there'd be something associated ... with doing some kind of record review, to ensure that the labeling was accurate." Number 1688 REPRESENTATIVE HARRIS asked how the other 26 states enforce it. MS. ADAIR said she isn't certain, although she is sure that they do it through some type of inspection and review of records. REPRESENTATIVE HARRIS suggested the need to find out how the other states do that. CHAIRMAN ROKEBERG proposed that it should be done after the bill is passed. Number 1711 REPRESENTATIVE BRICE returned attention to labeling and asked whether Ms. Adair recommends deleting the last sentence of the first paragraph on page 3, lines 2 through 4. MS. ADAIR clarified that she simply wants to check with the FDA. She has no problem with it unless the FDA has a problem with it, in which case she believes the consequences are too severe. Number 1747 REPRESENTATIVE HARRIS asked if the DEC prefers to see Sec. 17.20.015, in Section 2, deleted from the bill, as well as subparagraphs (2)(B) and (C) under Sec. 17.20.305, in Section 3, regarding penalties relating to meat. MS. ADAIR indicated either they need some way to verify that the meat has not been subjected to the synthetic hormone or they would want it deleted. All they are looking for is verification, but there is no way for the DEC to verify that it is true now. REPRESENTATIVE HARRIS asked whether, if that happened, this bill would be much easier for the DEC to defend. MS. ADAIR affirmed that. Number 1796 CHAIRMAN ROKEBERG asked how the state presently grades or inspects meat. MS. ADAIR explained that grading of meat is a voluntary program done by the Division of Agriculture, whereas safety inspections of meat are done by the DEC, through the Division of Environmental Health. "We do operate under the USDA rules for meat slaughter and inspection," she added. "We have to do ... pre-slaughter inspections, post-slaughter inspections of the carcass, to make sure that there's no diseases on the carcass. An inspector is required to be on-site at all times during the processing of the carcass to the meat product. We've essentially just adopted the federal rules by reference and follow those. We do send inspectors to Texas A&M to get meat training, and we have three meat inspectors in the state." CHAIRMAN ROKEBERG asked whether those inspectors are in Palmer. MS. ADAIR answered that two are in Anchorage at Anchorage Cold Storage (ANCO), noting that federal rules require a meat house to provide office space because the inspectors are to be on-site at all times. There is a part-time inspector in Fairbanks, as well as the state veterinarian in Palmer, who goes out in the field to do inspections, as several inspections are required to be done by a veterinarian. Number 1880 CHAIRMAN ROKEBERG expressed his understanding that the only major slaughterhouse is in Palmer. MS. ADAIR replied, "Slaughter, but there is meat processing that takes place elsewhere. Sausage is meat processing, and that's ... Indian Valley Meats, Alaska Sausage; the meat packer that was mentioned in Kodiak, he does meat processing. So, there's a variety of things that take place that are meat processing that don't involve slaughter." Number 1899 CHAIRMAN ROKEBERG inquired whether there are USDA inspectors in Alaska. MS. ADAIR answered, "We have an 'equal to' program, and so, we stand in for USDA." CHAIRMAN ROKEBERG asked if most of the beef grown in Alaska would qualify for the USDA's future "organic" designation and, therefore, for the label under this bill. Number 2004 BERT GORE, DVM, State Veterinarian, Animal Industries, Division of Environmental Health, Department of Environmental Conservation, answered via teleconference from the Matanuska-Susitna Legislative Information Office (Mat-Su LIO). He explained that there is a federal slaughterhouse on Umnak Island in the Aleutians, plus state slaughterhouses at Kodiak, Palmer and Delta Junction, as well as a state-operated slaughterhouse at Nunivak. Meat from Umnak Island would certainly be labeled as organic, Dr. Gore stated, which was the goal behind that organization, to get Aleutian beef that has no synthetic hormones, antibiotics or feed additives. He added, "Most of the animals that are beef animals up here, to my knowledge, we're not using synthetic hormones on." Dr. Gore pointed out that for dairy animals, in contrast, some non-rbST synthetic hormones are still used. He referred to Sec. 17.20.015 of the legislation and said, "Most of our dairy cattle that go to slaughter would not qualify for that, because of the other synthetic hormones that are used in those animals." CHAIRMAN ROKEBERG requested that Ms. Adair check with the FDA, indicating the bill would be held until her response was received. MS. ADAIR agreed to that. Number 2093 DON LINTELMAN, Northern Lights Dairy, testified next via teleconference from Delta Junction in support of HB 110. He told members he is in favor of the bill because he runs a milk-processing plant and would like to be able to label his milk as "no hormones being used." He believes that might provide him 5 percent more of the market. CHAIRMAN ROKEBERG asked Mr. Lintelman whether he periodically sells some stock for meat use and consumption. MR. LINTELMAN replied, "Just the bull calves." He indicated most customers for those are individuals from North Pole or youths who are taking on beef projects, for example. Most of the milkers they themselves use, selling very few to Palmer. "But they're not injected with any hormones at all," he added. Number 2169 ART GRISWOLD, Sleepy Hollow Farm, testified next via teleconference from Delta Junction in support of HB 110. Mr. Griswold would like to see a similar affidavit regarding beef, he told members. Noting that the additives aren't allowed for kosher beef, he said it is difficult to obtain beef that meets those requirements. He is raising a small herd of cattle for that reason, and would like to be able to send those animals to the slaughterhouse and have the beef labeled accordingly. Mr. Griswold indicated the Canadian government doesn't want these hormones used at all. He requested that restrictions on beef be retained. In addition, he wants to see the 18-day dating provision regarding milk put back into the bill; he believes that will help Alaskan farmers because much milk being shipped into Alaska is older than that. Number 2240 CHAIRMAN ROKEBERG asked whether Mr. Griswold looks at his small beef herd for organic meats as a growing area of business, provided that there is proper labeling. MR. GRISWOLD answered that he definitely believes it is a growing area of business. Whereas Mr. Lintelman is looking at a 5 percent increase in the market for his milk, he himself is looking at an opening in the beef market, if there is labeling, that has not been touched. CHAIRMAN ROKEBERG asked Mr. Griswold if he is also a dairy farmer. MR. GRISWOLD indicated he has dairy goats, but no dairy cows. Number 2286 MARLA McPHERSON, Cook Inlet Keeper, testified next via teleconference from Homer in support of HB 110. Ms. McPherson noted that Cook Inlet Keeper is a nonprofit citizen organization composed of over 500 members from Homer, Anchorage, Talkeetna and throughout the Cook Inlet watershed who are working to protect the environment and human health in Cook Inlet. She stated that Cook Inlet Keeper supports HB 110 because the bill is in the best interest of human health and the economic health of Alaska's meat and dairy farmers. Ms. McPherson explained that the public has an increased awareness and concern for human health because in the past four years people have witnessed a sharp increase in human health problems that may be directly linked to increased exposure to harmful synthetics such as rBGH. Cancer has risen 49.3 percent in the last four years and, today, 40 percent of Americans will contract cancer sometime during their lifespan. In fact, cancer is the leading cause of death among Americans between 36 to 64 years old. MS. McPHERSON said, although synthetic bovine growth hormone [rBGH] hasn't been proven to cause cancer, it's just one more thing that people are being exposed to that can contribute to human health concerns. She indicated that, although the FDA claims that rBGH is safe for human consumption, there still isn't conclusive evidence, which causes concern. Studies on the synthetic hormone show that the immune system detects and responds to the hormone, and, in fact, cysts have reportedly developed on the thyroids of male rats exposed to rBGH, and some of the rats suffered increased infiltration of the prostate gland. She said these studies are incomplete. Long-term toxicology studies have not been done to determine the ultimate effects of the hormone on human health. Number 2355 MS. McPHERSON believes they can't wait until there's substantial proof. She feels some people who might oppose this bill may claim that there's no proof that it causes cancer or human health concerns, therefore, it doesn't matter whether these things are labeled or not, but "we" can't wait until there's proof. She thinks that the surgeon general set a really good example when he said that smoking could cause cancer 30 years before there was conclusive scientific proof that, in fact, chemicals of cigarette smoke did cause cancer. She feels a precedent needs to be set by putting labels that say that the milk products are hormone-free so that people can be provided with the information they need to make a choice whether to consume the product or not. MS. McPHERSON believed the public has a right to know what chemicals and hormones are put into the food they consume, regardless if there's conclusive evidence those chemicals cause cancer or other health defects. Some studies of rBGH have already produced results of concern. She stated that it should ensure that humans have the timely and accurate information on the products they consume to make the choice on whether they want to consume it or not. Ms. Mcpherson thinks many people are concerned about their health and the health of their friends and family and children. She feels passing HB 110 will give people the information they need to make choices to protect their health. She agrees with the things that have already been said that HB 110 will create niche markets for meat and dairy farmers. These are the niche markets that need to compete with the large corporate farms from outside. Ms. Mcpherson urged the support of Alaskan farmers and human health in Alaska by passing HB 110. Number 2417 CHAIRMAN ROKEBERG asked Ms. McPherson to please fax her testimony to the committee for the record. He also asked if she could explain to the committee what Cook Inlet Keeper is and how it is funded. MS. McPHERSON stated that Cook Inlet Keeper was started three years ago by a settlement against the oil industry for over 4,000 violations of the Clean Water Act on the offshore oil platforms in the upper Cook Inlet. She explained that, instead of putting the money into the general reserves, the industry, the courts, the EPA [Environmental Protection Agency] and citizen organizations agreed that the money should go to establishing a non-profit organization that would essentially monitor environmental health in the Cook Inlet watershed. She indicated that, since the court decree has been fulfilled, the organization is now funded by citizen and foundation support. CHAIRMAN ROKEBERG asked Ms. McPherson if she is either a volunteer or a staff member of Cook Inlet Keeper. MS. McPHERSON replied that she is a staff member. CHAIRMAN ROKEBERG confirmed there were no further witnesses on HB 110. He asked if Mr. Fellman wished to comment in follow-up. Number 2471 MR. FELLMAN began, "I just wanted to take a second and point out that the concerns with the language..." [TESTIMONY INTERRUPTED BY AUTOMATIC TAPE CHANGE] [From tape log notes: 'concerns w/ pg. 2-3' 'Minnesota state law' '(language came directly from Minnesota law)'] TAPE 99-41, SIDE B Number 0001 MR. FELLMAN continued, "...it's been accepted I should say by the FDA, that is the exact language - there was a court case ... where it was challenged, and that particular language did stand up in that court case." CHAIRMAN ROKEBERG asked Mr. Fellman to please work with the department on that issue. The chairman mentioned he has a concern with Section 3 of the bill pertaining to the exclusion of persons from penalty for violation unless the person owns ten percent or more of the business. MR. FELLMAN indicated that some lines had to be drawn between how much of the interest the person may have in any given business to determine if they were going to be involved in the decision-making. He explained that 10 percent was established as the starting point with the hopes that it would cover the mean, again at the recommendation of Legal Services [Legal Services, Legislative Legal and Research Services, Legislative Affairs Agency]. CHAIRMAN ROKEBERG feels that this puts the focus on the small operator and excludes all the competition from being penalized. He suspects all major corporate dairies would not be included. Number 0067 MR. FELLMAN indicated he would check with legislative counsel and get more detail on that issue. He stated that in a lot of cases, such as with a corporation like Darigold, all the dairymen hold a small percentage of that corporation. CHAIRMAN ROKEBERG wondered if it is similar to stocks. MR. FELLMAN replied yes. CHAIRMAN ROKEBERG said that it appears to him that any corporate entity gets a stake here unless one goes directly to the chairman of the board and "try to apply a misdemeanor offense (indisc.), out-of-state foreign chairman of the board if you will, which may be very difficult to enforce." He asked Mr. Fellman to examine those concerns and provide a report to the committee. The chairman indicated HB 110 would be held for further work. Number 0137 CHAIRMAN ROKEBERG called an at-ease at 4:15 p.m. The committee came back to order at 4:19 p.m. HB 190 - VIATICAL SETTLEMENTS Number 0139 CHAIRMAN ROKEBERG announced the committee's next order of business would be HB 190, "An Act relating to viatical settlement contracts." REPRESENTATIVE HARRIS made a motion to adopt the proposed Version G committee substitute (CS) for HB 190, labeled 1-LS0576\G, Bannister, 4/14/99. There being no objection, it was so ordered. CHAIRMAN ROKEBERG explained that HB 190 was introduced as a committee bill when controversy arose regarding the nature of the regulation of viatical settlements as part of the Securities Act of 1999. Therefore, those provisions were removed from that Act and HB 190 was introduced. Chairman Rokeberg announced that he intended to take public testimony today and familiarize the committee with this area of the law, but not report the bill from committee. There is controversy regarding the proper regulatory home for viatical settlements; should it be located in the Division of Insurance or the Division of Banking, Securities, & Corporations in Alaska. He noted that he has had numerous discussions with the Department of Commerce and there seems to be the belief that the Division of Banking, Securities, & Corporations should take primacy in this area. However, many in the insurance industry disagree with that placement. Chairman Rokeberg requested that Mr. Elder come forward to explain the CS. Number 0238 TERRY ELDER, Director, Division of Banking, Securities, & Corporations, Department of Commerce & Economic Development, directed the committee to the committee packets which contain a six page packet entitled, "Viatical Settlements HB 190." He referred to page 2 of that packet regarding definitions. He explained that to "viaticate is the process in which a person sells the death benefit or ownership of a life insurance policy to a third party for less than its face value." The insured person who sells the policy is the "viator." Typically, there are many "viatical settlement providers" who are in the business of buying these death benefits and insurance policies from viators and then selling interest in those to third party investors. The contract entered into between the provider and the viator is called a "viatical settlement contract." MR. ELDER explained that HB 190 adds viatical settlement contracts to the definition of a security in the Alaska Security Act, Title 45.55. He said his current position is that most all viatical settlement contracts are investment contracts which are already part of the definition of a security. There are those who do not have knowledge of this position or disagree with this position. Therefore, it would beneficial to clarify in the Alaska Security Act that viatical settlement contracts are part of the definition of a security. At the same time, the bill would provide an exemption from registration making it fairly easy for the viatical settlement providers to comply with the law. The exemption would only require the filing of a notice and certain disclosures to investors. Number 0479 MR. ELDER stated that the primary objective of the bill is to protect Alaskan investors from sales abuses that have occurred across the country. He noted that the committee packet contained an article regarding viatical contracts from the March 1999 Kiplinger's Personal Finance Magazine. This legislation attempts to avoid such problems discussed in the article. He acknowledged that no one has yet come forward with problems as discussed in the article. He hoped that the next article in a major press group would not utilize Alaskans as the examples. Mr. Elder explained that avoiding this is accomplished primarily through disclosure, proper risk disclosure, to the public. This legislation would provide the department with a mechanism, if complaints or abuses are found, to take quick action. Most of the problems reported in the press revolve around abusive sales practices. He discussed some of the abuses cited in the aforementioned article. Mr. Elder stressed that he was not opposed to this business on any philosophical ground. However, if this is to be sold it is a security and there should be adequate disclosure to protect investors. He offered to walk through the CS by section. CHAIRMAN ROKEBERG agreed that would be helpful. MR. ELDER began with Section 1 of the CS which adds a reference to the new exemption, new subsection (g). That reference provides the division the ability to revoke or deny an exemption. Section 2 is the new exemption, subsection (g), which requires the filing of a notice and consent to service to the division before any sales are made. Included in Section 2 is also some basic information regarding the company doing the sales. CHAIRMAN ROKEBERG asked if this referred to each time a contract was sold to a member of the public. MR. ELDER explained that there would be a filing for each program. In further response to Chairman Rokeberg, Mr. Elder said that typically, the industry standard is a one year, two year, three year and a ten year program. If that continues, the provider would file a notice for each of those programs. CHAIRMAN ROKEBERG stated that the language was not clear to that point. He referred to page 2, line 7 of the CS which in part reads, "at least 10 days before any offers or sales are made...." He asked if that refers to the exempt registered individual. MR. ELDER clarified that it referred to the issuer, the viatical settlement provider. He noted that the agent is not filing anything, except to register as an agent. Number 0938 MR. ELDER continued with Section 2 which also provides for the registration of agents, paragraph (2). Paragraph (3) is the disclosure requirement to the investor. He pointed out that much of the language in subsection (g) is from the current exemption at (b)(5)(B). Paragraph (3) is the language which was passed in HB 83 related to the exemptions of (b)(5)(B). Paragraph (4) requires that the firm be in business for three years and have no defaults. Subsection (h) lists those things which would disqualify an issuer from utilizing this exemption, although it may not disqualify the issuer from a full registration. That language is taken from the accredited investor exemption in HB 83. Subsection (i) merely allows copies of advertising materials and such to be requested by the department. MR. ELDER moved on to Section 3 of the CS which is a new section to AS 45.55. This section would provide purchasers the right to rescind purchase within three days of receipt of the final disclosure document or paying the agreed upon amount, whichever is later. Subsection (b) of Section 3 simply specifies that notice would become effective. Section 4 changes the definition of "issuer" to include the person creating the fractional or pooled interest or the person who effected the transaction with the investor. He clarified that it would not include a broker, dealer, or agent. Section 5 includes the amendment to the definition to "security" which adds "viatical settlement contract" on line 14, page 5 of the CS. Mr. Elder referred to page 6, Section 6 which inserts three new definitions necessary in the Securities Act which are as follows: viatical settlement contract; viatical settlement provider; and viator. With regard to the definition of viatical settlement contract, he stressed that the language is not referring to the regulation of the viatical settlement provider's relationship with the viator. There is only the regulation of the sales of the securities by the viatical settlement provider. He pointed out that the definition of viatical settlement contract excludes four items, subparagraphs (A), (B), (C), and (D). Subparagraph (A) is essentially the sale of the contract by the viator to the viatical settlement provider. Subparagraph (B) excludes the transfer or sale between the viator and a friend or family member. Subparagraph (C) excludes the use of the life insurance policy when it is being used as collateral for a loan. Subparagraph (D) excludes the viator when that person utilizes the accelerated benefits under the terms of the life insurance policy. MR. ELDER commented that to the extent possible, the division is staying out of the insurance business. Only the security and investor protection side is being addressed. Mr. Elder noted that he had conversations with the Division of Insurance which agrees that these are securities and that it is in the Division of Securities, Banking & Corporations' purview and responsibility to regulate this part of the business. With regard to the possible suggestion that the NAIC Model Act should be adopted, he pointed out that deals with the viatical settlement provider and the viator. That provides protections for the viator which is a separate issue that is not addressed in this legislation. If that is addressed at some point, he suggested that be kept separate from the regulation of securities. Number 1296 CHAIRMAN ROKEBERG inquired as to the location of the language in the bill which addresses the agents making the sales. MR. ELDER directed the chairman to page 2, line 21 of the CS. In further response to Chairman Rokeberg, Mr. Elder clarified that agents register with the division. CHAIRMAN ROKEBERG inquired as to the procedures of AS 45.55.030(a), (c) and 45.55.040. Are they exempt agents also? MR. ELDER explained, "We already have in our Act the definition of agent. If they're exempt from that definition, then they would not register." CHAIRMAN ROKEBERG posed the situation in which the agent was an insurance person. MR. ELDER said the person would have to register with the division. He commented that many are already registered with the division. The registration is a simple procedure in which each company with agents would file a form with the division and pay the fee. In further response, Mr. Elder said that there is a requirement for agents who register under our chapter to take the Series 63 exam which covers state law. Number 1414 REPRESENTATIVE CISSNA referred to Section 3 and asked if it is standard to provide three business days for the right of rescission. MR. ELDER commented that there is nothing standard about viatical settlements which are so new. He noted that Maine is on the verge of passing a new law from which this language was taken. He pointed out that the committee should have information related to the legislative hearings in Maine. The director of securities in Maine decided to change the three days to 30 days due to the testimony of a sales agent and an investor who experienced problems. REPRESENTATIVE CISSNA seemed to agree with the change to 30 days. REPRESENTATIVE MURKOWSKI pointed out that the information in the committee packet indicates there is a split with regard to whether viatical settlements should be covered under the Division of Insurance or the Securities Act. She understood Mr. Elder's and Chairman Rokeberg's testimony to be that the Division of Insurance feels that securities should have primacy over this issue. She surmised that the division feels this way because this legislation regulates the sales of the securities. If the relationship between the viator and the viatical settlement provider was being regulated, it may be appropriate to be under the Division of Insurance. However, since the discussion here surrounds the sale of the investment contract, this is subject to securities. MR. ELDER added, "What we and what the Division of Insurance are both saying is that the relationship of the viator and the viatical settlement provider and everything that goes past that to the insurance company, that would - that the NAIC Model Act talks about, that would be properly discussed with the Division of Insurance. ... Let's say you passed a viatical settlement act that adopted that, they would agree that the sale of the securities forward to the investor should be something that would be regulated by our division." Number 1692 DANA CASHEN, Accelerated Benefits Corporation; Co-Chair, Legislative Committee, National Viatical Association (NVA), testified via teleconference from Florida. She informed the committee that the Accelerated Benefits Corporation is a licensed viatical settlement corporation in Orlando, Florida. Ms. Cashen said she was happy to see and in favor of Alaska taking interest in protecting its consumers. She noted that NVA and the Viatical Association of America have been working with the (National Association of Insurance Commissioners) NAIC Viatical Settlement Working Group to draft the Model Act and address some of the concerns with the industry. Ms. Cashen said that with her initial reading of the bill, there are some concerns with some of the language. Therefore, she expressed the need to have more time to sit down with the involved parties in Alaska in order to discuss some of the alternatives that she has worked on. Ms. Cashen informed the committee that she is in Tallahassee, Florida today watching "our House Bill" move from committee to the floor. The legislation is pretty interesting and addresses the scenario being addressed in HB 190, the portion of the transaction which deals with the purchaser and the viatical settlement provider. Florida already has laws regulating the viator and the viatical settlement provider. Florida is the first state to do such. MS. CASHEN noted that the NAIC Working Group has received a couple of charges to address for 1999. One of those charges is to review the relationship between the purchaser and the viatical settlement provider. This will be discussed at a meeting next week in Kansas City, Kansas. The discussions will begin with regard to how more protections can be provided to the purchaser. Ms. Cashen commented that her consensus from NVA is that it would like to work with Alaska to share information from the NAIC, Florida, and other states. CHAIRMAN ROKEBERG asked Ms. Cashen to explain what the NAIC is. MS. CASHEN clarified that the NAIC is the National Association of Insurance Commissioners. The association includes commissioners from around the country who meet on a quarterly basis. The association is fairly complex and covers many different insurance issues. CHAIRMAN ROKEBERG noted that the committee packet includes the April 15, 1999 "Draft NAIC Model Act With Wraparound." He asked if the Model Act refers to the transaction between the sales agent and the purchaser. Number 2066 MS. CASHEN explained that the current NAIC Model Act only deals with the relationship between the viator and the viatical settlement provider. The aforementioned information in the committee packet is the viatical settlement industry's attempt to take the current model and insert language within that model which addresses the purchaser to provider relationship. In addition to disclaimers and advertising regulations, the main concept in the NAIC Model Act With Wraparound is to have agents soliciting purchasers to buy these policies to be licensed as are life insurance agents. Ms. Cashen felt this is clearly an insurance product and those speaking with potential purchasers should have such knowledge. For example, in Florida where there are viatical settlement laws the Department of Insurance is able to regulate the entire transaction. CHAIRMAN ROKEBERG noted that his staff had a copy of Florida's SB 1242, but recalled that Ms. Cashen referred to a House Bill. MS. CASHEN specified that to be the Senate's companion bill. She informed the committee that the House Bill is HB 2235 which passed out of Florida's House Insurance Committee today. House Bill 2235 should be headed to the floor at least by early next week. The Senate Bill has passed out of Florida's Senate Insurance Committee and the Senate Judiciary Committee and is headed to the Senate floor. Therefore, both bills should be headed to both floors next week. In response to Chairman Rokeberg, Ms. Cashen explained that the two bills in Florida have some differing language. She explained that in Florida, each house has to pass the identical version. Ms. Cashen predicted that there would be discussion regarding the differences and whichever body passed its bill out first would be the vehicle. REPRESENTATIVE MURKOWSKI pointed out that the legislation before the committee would amend the Alaska Securities Act to include a viatical settlement contract. She surmised that is not the case with Florida's legislation. She inquired as to what other states have done with their Securities Act and whether viatical settlement contracts are included within the definition of a security. MS. CASHEN said that up until this legislative session there were not any states that included viatical settlement contracts in their Securities Act. This year about three to five states have introduced legislation similar to that being introduced in Alaska. To her knowledge, only two have passed this session. Ms. Cashen stated that the vast majority of states passing viatical settlement legislation seemed to follow the lead of the NAIC model. She commented that the issues being dealt with in Alaska are on the radar screen of the NAIC. TAPE 99-42, SIDE A Number 0001 DOUG HEAD, President, Viatical Association of America (VAA), testified via teleconference from Florida. Mr. Head noted that the committee should receive the wraparound document that is being proposed to the NAIC. The wraparound document was developed in negotiations with Florida's Department of Insurance which is largely reflected in Florida's Senate bill. However, there is one significant difference between Florida's House and Senate bills. Florida's Senate bill addressed the emerging Life Settlement Industry which involves transactions of policies of healthy persons such as high net worth executives who wish to dispose of their life insurance. The wraparound document sent to the committee should contain some language referencing the Life Settlement Industry. Mr. Head commented that he believed that the viatical settlement industry has been extensively reviewed from the viator's side by NAIC. Number 0166 MR. HEAD stated that the greatest concern with the legislation before the committee is the adequacy of the definitions. The discussion from committee members regarding how exactly this would function is also of concern for Mr. Head. He pointed out that VAA has a number of members that are large institutional purchasers. Mr. Head commented that the previous description of the typical viatical transaction is not necessarily identical from the many models of different methods for raising funds experienced by companies in VAA. Therefore, he expressed the need to have the opportunity to review the specifics of this law with all VAA members. He was concerned that the transaction does not always involve a one, two, three, or ten year package of policies. Sometimes the transaction involves single policies, multiple policies, and the registration process which may make it prohibitive to do business in Alaska. He noted that Maine is a state in which essentially, no one does business due to the passage of Maine's Viatical Act about a year ago. Mr. Head said that he would like to work with the committee to ensure that there are appropriate protections under the insurance umbrella for all aspects of that industry. CHAIRMAN ROKEBERG asked if there are two different viatical associations. MR. HEAD replied yes, but noted that at this point there is really no separation in policy. CHAIRMAN ROKEBERG asked if it would be correct to view Mr. Head as representing the viatical settlement providers. Number 0431 MR. HEAD informed the committee that he is employed by a viatical settlement broker, the Medical Escrow Society, the largest in the nation. He clarified that he works directly with viators. Under the NAIC model, a viator is a person who owns a policy on the life of a person that may not necessarily be terminally ill. In further response to Chairman Rokeberg, Mr. Head clarified that the owner of the policy may or may not be the person with the disease under the viator definition in the NAIC model. The terminally ill person is identified as the insured. Mr. Head noted that the NAIC Model Act contains many definitions which he urged the committee to review because the NAIC definitions may be improvements on those in HB 190. Mr. Head explained that to him a provider is a company, no matter how they are funded, that is engaged in purchasing viatical settlements. CHAIRMAN ROKEBERG noted that there has been testimony that very few states have regulations. Ms. Cashen testified that three to five states may have some type of security regulations. MR. HEAD said that there are a number of states and securities commissioners that have made rulings or are in negotiations. Depending upon the fund-raising model utilized by the provider, there are a range of possibilities. The funding models, the relationship with particular purchasers, the definitions of securities, commissioners and the legislatures vary from state to state. He believed that North Dakota, South Dakota, and Iowa are the only states that have engaged in legislation moving in this direction. North Dakota has effectively outlawed viatical settlements no matter who is the provider. South Dakota has no industry, that he was aware of. Iowa has a small industry. Larger states such as Texas, New York, California, and Florida have had successful experiences regulating the relationship between the provider and the (indisc.). "Florida is the first with a living, dynamic viatical settlement industry to begin to figure out how to structure the purchaser side regulation under the insurance umbrella." CHAIRMAN ROKEBERG inquired as to how many states have a regulatory scheme that is enforced by their Insurance Commission or their Division of Insurance. MR. HEAD said that he believed that every state which has a viatical settlement law, with the mentioned exceptions, places viatical settlements under the Division of Insurance. The last time he looked, he counted 27 such states. Number 0796 CHAIRMAN ROKEBERG informed Mr. Head that Alaska is problematic in that it does not have any law or regulations specifically drafted for the viatical settlement industry. Therefore, Mr. Elder and the Division of Securities, Banking & Corporations generated some cease and desist orders when advertisements guaranteed returns on investments of these contracts. MR. HEAD commented that may have been an appropriate step. He said that the VAA model suggests and agrees with NAIC that there should be extensive disclosure to purchasers. However, Mr. Head believed that regulating this under the securities umbrella seems to divide the process. Mr. Head indicated that it would be best to track the entire transaction due to the belief that the product from its beginning is an insurance product, a life insurance policy. Therefore, full regulation of the entire transaction should fall under life insurance regulators. CHAIRMAN ROKEBERG noted that the Alaska Division of Insurance does not agree with Mr. Head. He inquired as to the types of problems that occurred prior to any regulatory reform because there seems to be a plethora of abuse and misunderstanding surrounding the viatical industry. MR. HEAD stressed that the biggest problem, as with any new product, is that there are fraudulent actors. The most disastrous of those fraudulent scenarios occurred in the West and Northwest and may have entered Alaska. With regard to Kiplinger's article, Mr. Head believed it was not entirely accurate and that there was some poor and sensational reporting. Mr. Head acknowledged that there is fogginess surrounding this industry, but he hoped that this option will continue to be provided for those who have life insurance and wish to sell it. This is a property issue which everyone should keep under review. He stated, "We need to be concerned about whether there is a market for their policies and whether we properly regulate it. And we think we're moving, with the NAIC, in the right direction and that Alaska should - and we are more than anxious to work with you to develop appropriate regulation and we do believe very strongly that it belongs in the insurance department." CHAIRMAN ROKEBERG identified one of the current dilemmas as whether the Alaska Division of Banking, Securities, & Corporations should regulate until a statutory scheme is in place for this. Chairman Rokeberg did not believe it to be in the public's interest to cease marketing of these, if they can be done in a manner which does not harm the public. He did not believe it appropriate to shut down the viatical settlement industry, while Alaska "gets its act together legislatively." MR. HEAD agreed with that view. He cited one of the difficulties as the collateral issues associated with direct securities regulation which confuse the potential for people to make appropriate investments in this product. There are also problems created for the viator who wishes to sell his/her life insurance policy. For example, a terminally ill individual with two $20,000 policies who wanted to sell those policies to a brother-in-law would be required to file due to the single sale exemption. Number 1153 MR. HEAD commented that there are many technical issues with HB 190. The definitions need extensive review. He noted that he would like to work quickly and with the Department of Insurance to establish a complete regulatory scheme to protect the terminally ill viator as well as investors. With the emergence of life settlements, there is yet another emerging problem. Therefore, all of this regulatory phenomena should be placed in a central location. Mr. Head believed it would be difficult for the Division of Banking, Securities, & Corporations to regulate the other side of the industry, as the director commented earlier. CHAIRMAN ROKEBERG said that he had heard mention that many in the securities industry do not really have the understanding or patience to sell this product. Therefore, those with a life insurance background are better marketing sales agents for this type of product. Is that an appropriate assessment? MR. HEAD agreed that Chairman Rokeberg's assessment was appropriate. In further response to Chairman Rokeberg, Mr. Head explained that there are many variables in life insurance which are best known by life insurance agents. He did not know of any security that required premium payments which is unique to life insurance. Furthermore, there are issues regarding maintaining premiums on portions of the policies. Today it is possible to sell portions of a life insurance policy and that creates significant premium issues which are best handled by a life insurance agent. CHAIRMAN ROKEBERG asked whether that was due to the pre-paid dividends and the adjustments for annual premiums with an aged policy. Number 1301 MR. HEAD replied yes. For example, an individual with a life expectancy of two years who purchased a policy at 60 years of age has a much higher premium than an individual at the same age who purchased the same policy at 30 years of age. Therefore, these packages are part of what a good insurance person can explain to a purchaser. For securities sales people, the language associated with such a situation is not typically familiar language. In summary, Mr. Head stated that good disclosure to the investor is the objective. Good disclosure would best come from a sales person who has knowledge of the product he/she is selling. He agreed to be available to talk with staff and offered to provide the committee with additional written testimony to illustrate some of these problems. CHAIRMAN ROKEBERG announced that he would be talking with those in the industry in Alaska as well as the various departments. He also announced that he did not intend to report HB 190 out of committee today and will only do so when the legislation is ready. Number 1417 JACK GWALTNEY, General Agent, Future First Financial Group, Gwaltney & Gwaltney, Incorporated, testified via teleconference from Anchorage. With regard to the testimony from those in Florida, they are accurate in what it would take to do this right. Mr. Gwaltney agreed that there needs to be some legislation to accommodate all parties concerned. He noted that the testimony has made it apparent that there are many parties involved in one of these transactions. This is a complicated issue. Mr. Gwaltney offered to work with the committee on this issue. CHAIRMAN ROKEBERG announced that HB 190 would be held. ADJOURNMENT Number 1530 There being no further business before the committee, the House Labor & Commerce Standing Committee meeting was adjourned at 5:27 p.m.