Legislature(1993 - 1994)
03/19/1993 01:40 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE JUDICIARY COMMITTEE March 19, 1993 1:40 p.m. MEMBERS PRESENT Senator Robin Taylor, Chairman Senator Rick Halford, Vice-Chairman Senator George Jacko Senator Suzanne Little MEMBERS ABSENT Senator Dave Donley OTHERS PRESENT Senator Jay Kerttula COMMITTEE CALENDAR SENATE BILL NO. 86 "An Act relating to funds transfers under the Uniform Commercial Code; changing Alaska Rule of Civil Procedure 82; and providing for an effective date." CS FOR SENATE BILL NO. 112(L&C) "An Act relating to the Uniform Commercial Code; amending Alaska Rules of Civil Procedure 8 and 82, and Alaska Rule of Evidence 402; and providing for an effective date." SENATE BILL NO. 149 "An Act revising the laws governing financial institutions and relating to trust companies, the Alaska Small Loans Act, and the Premium Financing Act; amending Alaska Rule of Criminal Procedure 17 and Alaska Rule of Civil Procedure 45(b); and providing for an effective date." PREVIOUS SENATE COMMITTEE ACTION SB 86 - See Labor and Commerce minutes dated 3/2/93. SB 112 - See Labor and Commerce minutes dated 3/2/93 and 3/4/93. SB 149 - NONE WITNESS REGISTER Bill Kelder, Aide Senator Jay Kerttula State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Testified on SB 86 & SB 112. Art Peterson, Attorney Uniform Law Commissioner for Alaska Dillon & Finley One Sealaska Plaza #202 Juneau, Alaska 99801 POSITION STATEMENT: Testified on SB 86 & SB 112. John Beard, Attorney Beard & Lawer 425 G Street #630 Anchorage, Alaska 99501 POSITION STATEMENT: Testified on SB 112. Josh Fink, Aide Senator Tim Kelly State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Testified on SB 149. Willis Kirkpatrick, Director Division of Banking, Securities & Corporations Dept. of Commerce & Economic Development P.O. Box 110807 Juneau, Alaska 99811-0807 POSITION STATEMENT: Testified on SB 149. Jeff Bush, Attorney 175 South Franklin St. #318 Juneau, Alaska 99801 POSITION STATEMENT: Contracted to Div. of Banking. ACTION NARRATIVE TAPE 93-27, SIDE A Number 001 Chairman Robin Taylor called the Judiciary Committee meeting to order at 1:40 p.m. SENATOR TAYLOR introduced SB 86 (FUND TRANSFERS UNDER THE UNIFORM COMMERCIAL CODE) and SB 112 (UNIFORM COMMERCIAL CODE REVISIONS) both sponsored by SENATOR JAY KERTTULA, and announced they would be on teleconference. SENATOR KERTTULA referred the committee to his aide, BILL KELDER, to read a statement, and he promised a packet of information for the committee members. SENATOR KERTTULA explained he was asked to be a facilitator for the Supreme Court to attach the new amendments to the Uniform Commercial Code, have them drafted by Legislative Legal Counsel, and brought before the legislature. SENATOR KERTTULA reviewed the packet of information and invited MR. KELDER to read his statement. MR. KELDER explained SB 86 and SB 112 were companion pieces of legislation that would amend the Alaska Uniform Commercial Code. Number 072 MR. KELDER read from SENATOR KERTTULA'S statement: " The UCC is a comprehensive codification of commercial law; however, until the promulgation of Article 4A in 1989, it did not deal with funds transfers between commercial entities. As business practice has come to rely more heavily on the speed, efficiency, reliability, and comparatively low cost of electronic technology, it is apparent that Alaska's commercial laws need to be brought up to date. The new Article 4A embodied in SB 86 does this and has been adopted by 45 other states. In 1989, a record three trillion dollars were transferred on a single day - more money than the 1989 gross product of the United States - and the 1989 average was one trillion dollars a day. Presently, unless the parties to a transaction use the same bank, a funds transfer involves at least four entities ... numerous problems and questions can arise. This bill provides for a significant improvement in Alaska Law. It will help keep Alaska's Uniform Commercial Code up to date, thus tending to assure a favorable commercial climate here - one that is in line with the rest of the country." MR. KELDER presented a zero fiscal note from the Department of Law, and in addition, he said financial regulators are encouraging individual states to enact the provisions included in Sb 86. He expressed the concern that unless states adopt these regulations and provisions, the federal government will enact a national UCC - and do their own enforcement. MR. KELDER added the provisions in SB 86 have been endorsed by the National Conference of Commissioners on Uniform State Laws, which helped draft the legislation. To begin the discussion of SB 112, MR KELDER read: "Senate Bill 112 makes amendments to Alaska's Uniform Commercial Code ... these changes are designed to bring the code up to date with the rest of the country. The first change adds a new Article 2A to the existing law. While the existing law covers commercial property leases there is no language relating to personal property leasing. Article 2A deals with what is called "true" leases and "finance" leases. The article provides the statutory answers to a broad range of legal issues, covering such matters as offer and acceptance, warranties, mistakes, failure to perform, risk of loss and remedies. The current absence of these rules promotes litigation. Articles 3 of SB 112 reorganizes the existing material in the state code to make it more clear and to account for modern technologies. These revisions fix many of the problems that have arisen over the past 40 years with the Uniform Commercial code with negotiable instruments. Some of the changes in Article 3 and Article 1 of SB 112 are necessary to bring these articles into compliance with the new language in Article 4A as it appears in SB 86. One important change in Article 3 is that the revision recognizes there are two types of instruments - notes and drafts - which usually perform different functions; therefore, merit different treatment. Benefits from enacting Article 3 of SB 112 include, but are not limited to, the following: certainty of the law, speed and reliability, lower costs, reduced litigation, and stricter standards for fiduciaries. Number 163 Finally, SB 112 seeks to repeal Article 6 of the present Uniform Commercial Code ... deals with bulk sales. A bulk sale is one in which a business sells all or a large part of its inventory to a single buyer outside the ordinary course of business. In addition, under Article 9 of the existing code, protections for creditors are more significant than in the past. Because of these factors, the National Conference of Commissioners on Uniform State Laws, and a group of 16 Alaska Business Law Attorneys, have recommended that Article 6 be repealed. This bill received a zero note from the Department of Law's Division of Legal Services." SENATOR TAYLOR asked for questions on either SB 86 or SB 112, and SENATOR LITTLE presented a problem, which she thought might be addressable under the two bills. SENATOR LITTLE quoted a constituent as not being notified when their note for the mortgage of their house was not transferred from buyer to seller. SENATOR TAYLOR called on ART PETERSON, in his capacity as a Uniform Law Commissioner, to answer questions. MR. PETERSON explained this bill did not include an answer to SENATOR LITTLE'S question, but he explained the primary benefit of the bill is its uniformity with the rest of the nation. He said if reasonable notice to borrowers is needed, it would presently be outside the Uniform Commercial Code. Number 223 SENATOR HALFORD asked for the difference in the original bill and the Labor & Commerce committee substitute for SB 112. MR. PETERSON began by expressing support for SB 86 and SB 112 as essential to keep Alaska from receding into the backwater in the commercial area. He indicated there were about 5 or 6 very minor changes, and SENATOR HALFORD asked to be informed. 1. page 4, lines 20 & 21 - the words the code were inserted on page 20 and AS 45.12.207 inserted on line 22. 2. page 48, line 16 - change (d) to (e). 3. page 86, lines 13 through 15 - A new sentence "These sections may not be construed to defeat the prime opposition of a municipal tax lien under AS 29.45.300(b)" had been added, and MR. PETERSON proposed it be deleted. SENATOR TAYLOR moved to delete on page 86 line 13, the sentence beginning with "These sections ..." SENATOR JACKO asked why the sentence didn't fit in the bill. SENATOR TAYLOR explained the sentence would place a super tax lien on assets, which would make it a superior lien, over and above those liens held by the banks, and which would be devastating as far as transactions sold outside the state. Number 290 MR. PETERSON described how, by leaving it in the bill, it would affect other liens in statute, and he gave examples. He explained the sentence in question is a cross reference that emphasizes one lien at the expense of all others, and he encouraged the committee to remove it. Upon hearing no further questions, SENATOR TAYLOR renewed his moved to delete the sentence on page 86, lines 13 through 18. Without objections, so ordered. 4. page 106, lines 28 & 29 - the sentence at the end of subsection (c) - "If the certificate of title statute is silent on the issue of transfer, this section controls." MR. PETERSON described the ambiguity in the first sentence in subsection (c), and he explained why this sentence was added, after some research, to the committee substitute. 5. page 112, line 16 - to adjust an ambiguity in the lettering of the subsections. MR. PETERSON described the first sentence in subsection (e) as combining a disjunctive element with a conjunctive elements and explained how the problem was corrected after consultation with PROFESSOR MILLER. 6. page 112, lines 25, 28, & 29 - line 25 & 28 had typos - line 29 - insert lessor or before "lessee." SENATOR TAYLOR, satisfied there were no more changes, invited JOHN BEARD to testify from Anchorage. MR. PETERSON identified MR. BEARD as a knowledgeable commercial law practitioner sitting in for JERRY KURTZ, another Uniform Law Commissioner for Alaska. MR. BEARD explained he had practiced commercial law for 22 years, which has been heavily impacted by the two bills. He indicated his support for SB 112 and SB 86 and vouched for all the reasons covered in SENATOR KERTTULA'S remarks. He explained how the bills would update the way in which money is transferred, trends in leasing, and bank collections. Number 405 SENATOR TAYLOR, MR. BEARD, and MR. PETERSON discussed some of the points as covered in the bills. SENATOR JACKO moved to pass CS FOR SENATE BILL NO. 112(JUD) (UNIFORM COMMERCIAL CODE REVISIONS) from committee with individual recommendations. Without objections, so ordered. SENATOR JACKO moved to pass CS FOR SENATE BILL NO. 112(JUD) (FUND TRANSFERS UNDER THE UNIFORM COMMERCIAL CODE) from committee with individual recommendations. Without objections, so ordered. SENATOR TAYLOR introduced SB 149 (REVISION OF BANKING CODE) sponsored by SENATOR TIM KELLY, and invite his aide, JOSH FINK, to testify. MR. FINK deferred to WILLIS KIRKPATRICK, to testify. Number 438 MR. KIRKPATRICK identified himself as the Director for the Division of Banking, Securities & Corporations and thanked the committee for hearing the recodification of the Alaska Banking Code. He said he would give a brief explanation before introducing JEFF BUSH, the contractor for the department, who helped do the drafting for the recodification. MR. KIRKPATRICK gave some historical perspective on ten years of building up to the determination the Alaska Banking Code was becoming obsolete. The code originated in Oregon before Statehood and was adopted at that time, and during that time, Oregon has basically recodified or amended their code two different times, so there is presently no similarity between our law and Oregon's law. MR. KIRKPATRICK explained the changes that were occurring in the market place were happening faster than could be addressed. He further explained the obsolescence in the original statute fall into three areas: first; the marketplace has changed dramatically; second, financial institutions with multiple failings; and third, a need for a banking law that could provide additional economic development opportunities. MR. KIRKPATRICK claimed all of these areas of obsolescence put a bind on financial institutions. He wanted to reform the new banking code to be as liberal as possible in order that banks might be a better support to their community in the way of subsidiaries, interstate branching, or other related activities. Number 480 MR. KIRKPATRICK quoted former COMMISSIONER GLEN OLDS as being excited about international bank branching. Presently, there is a branching law in the code, but he explained in 1972 the Canadian Bank of Commerce was unable to branch into Alaska, since the law just didn't allow the branch. After a few years of history, he further explained the new act would be clear as to the procedures needed to enable foreign banks to set an office in Alaska, with two benefits. MR. KIRKPATRICK said these benefits would include a time zone and a centralized location to other market centers, allow foreign interests to develop energy for their countries' customers, and might benefit the development of our resources. MR. KIRKPATRICK suggested MR. BUSH proceed with a sectional analysis. SENATOR TAYLOR opened the meeting to questions, and SENATOR JACKO asked for an explanation of the changes in the financial markets. MR. KIRKPATRICK explained there was no longer a Regulation Q that regulated the deposit side of the financial statements, and one of the biggest problems is that the barriers, as brought out in the UCC, have been broken with electronic funds transfer. He further explained that if the states don't do something, then Congress is going to dictate interstate branching. This would allow any bank in other states to branch across the street from our banks in Alaska without any control over them. He continued to describe the barriers that have been falling with competition such as the proliferation of credit cards. He explained changes that make the 1930's law obsolete. SENATOR JACKO asked if the bill would limit the types of competition he described. MR. KIRKPATRICK said there had been no attempt to try to change or limit the other market places, but to address the ability of the state's financial institutions to be more competitive. Number 553 SENATOR TAYLOR asked JEFF BUSH for comments and thanked him for the sectional analysis he had done for the committee. He suggested that MR. BUSH give an overview of the legislation and take questions. MR. BUSH explained he was contracted, not only to work on the Alaska Banking Code, but also the associated regulations, which were in the bill packets. He said he would just skim the high points of the sectional analysis. MR. BUSH broke his subjects down into three areas - bank powers, bank regulation, and enforcement - which were changed. Under bank powers, MR. BUSH touched on international banking, which he thought was the most significant area of change in the proposed act. These banks might move from other states as well as other countries and could operate in Alaska, under some specific rules and regulations in order to set up their branch in Alaska. He thought MR. KIRKPATRICK had adequately explained the international banking changes. MR. BUSH said his second area was providing for banks to have subsidiaries such as separate corporations within the banks, and he gave the example of the First Bank in Ketchikan, which operates a title insurance company. He explained why these were unique to Alaska, where it is important for a bank to be able to operate a subsidiary to help them in their business. MR. BUSH said banks need to be able to ... TAPE 93-27, SIDE B Number 001 ... make a profit because regulations sometimes makes it difficult, but their competitors mentioned by SENATOR JACKO, such as Merrill Lynch, do not have the same kind of regulations as a bank does. MR. BUSH explained the third area addressed in the legislation was lending limits and the adoption of the general lending limits that the federal government and the Office of the Comptroller of the Currency (OCC) has also adopted. He outlined problems dealing with loans to one borrower, where the banks are prohibited from lending too much of its capital to one entity. He reviewed a couple of banks that got into trouble by lending to multiple parties to a transaction, all secured to the same project. MR. BUSH said there were a number of restrictions on lending on real estate mortgages, and he reviewed the regulations from the 1930's dealing with this. He said it now depends on the stability of the bank; however, the legislation eliminates the specific restrictions on loan-to-value and limits, to allow the banks more flexibility in real estate lending. MR. BUSH explained the legislation expands the type of property that a bank can own to include property used for promotional purposes. Current law limits the property to "what is necessary for a banking business." The changes in the bill would allow the banks to own property, and he gave some examples. MR. BUSH said the legislation changed capital and reserve requirements by regulation, and he said they were currently negotiating with the banks as to what figure that should be. He said the intent was not to change the reserve requirements, but to make it easier to tell what the reserve is for a particular bank. He explained the present use of varying percentages based on differing types of deposits that must be kept in reserve, and he explained how the legislation would affect demand deposits. SENATOR TAYLOR presented the example of a newly formed bank, the TAYLOR, LITTLE, JACKO BANK, with $300 in deposits, and asked, under the current reserve regulations, how much they could lend. Under their of example of a $300 deposit, there was agreement they could probably not loan any. There ensued a discussion of percent of deposits, type of deposits, withdrawal of reserves, and MR. KIRKPATRICK estimating they could loan about $1.80. The discussion continued until they agreed the bank would have to keep $24.00 and could loan the rest. Number 068 SENATOR JACKO asked about the capital reserve requirements, and MR. BUSH said it was set in both state and federal law. MR. BUSH described the difference of philosophy between the federal and state requirements, and he explained the differences. There was a discussion of the regulations by the FDIC and the OCC in relation to reserves. SENATOR TAYLOR wanted to know why the state bothers to regulate banks on a state level since they are under such significant regulations by the FDIC and the OCC. MR. KIRKPATRICK said it was protectionists against federalism, and he explained the National Banking Act as being for a specific purpose - to repay the cost of the Civil War. He explained the relationship with the state and the banks as being cheerleaders as well as regulators. He described the intent of state law was to service the needs of a specific community, such as a mobile branch for Greens Creek, the NOW accounts, and being available to the state's constituency. MR. KIRKPATRICK explained there is a Mutual Savings Bank Act under Alaska law, and he praised the Mt. McKinley Mutual Savings Bank in Fairbanks as a great thrift institution. He said he didn't want the federal government managing the financial institutions in Alaska any more than we do the Fish and Game. Number 147 SENATOR TAYLOR returned to an answer from MR. BUSH about amending the reserve requirements and asked how the changes implemented in this law would affect the amount of money their hypothetical banks could loan. MR. BUSH said it was difficult to determine because in their simple bank there would be a difference if it had a savings deposits, checking deposits, or a NOW account. He explained the legislation would propose a 15% across the board reserve, so they would have to keep $45 of the $300 in their mythical bank. MR. BUSH said some of the banks were upset at this proposal as being too high an amount of money to have in their vault, and he explained changes in what form this amount could be. Rather than being money in the vault the 15% could be in the form of CD'S, all kinds of bonds, or in other assets that can be readily liquidated. SENATOR TAYLOR reviewed the provisions of the bill as related to their mythical bank and expressed concern over the liquid assets as opposed to money in the vault. MR. BUSH shared some of his concerns, but added the mythical bank was still subject to examination, and he didn't think MR. KIRKPATRICK'S division would allow a faulty action to exist. He explained the bank depositors would remove their deposits leaving their bank out of compliance with the limitations. MR. BUSH further explained there was a push on to make the liquid assets include stocks that are marketed. They have resisted that move, but would allow government bonds for reserve requirements. Number 216 SENATOR TAYLOR continued in his concerns that the only regulation would be through legislatively passed regulations, and he thought there were some broad perimeters and policies set in the legislation on the reserves. MR. KIRKPATRICK outlined one of the problems being problems themselves change, and he told SENATOR TAYLOR he was absolutely correct in his assessment of the liquidity problem. He described two failing banks in California that are heavy into correspondent banking, which means that any bank that is relying on that correspondent relationship for liquidity. He said they are both in trouble and would be monitored quickly. He outlined the steps that would be taken to rectify the problem and had decided the best method was regulation. MR. KIRKPATRICK continued with his recommendation of 15% liquidity on the formula, and he claimed it was easier to monitor by regulation as the new instruments become available. MR. BUSH explained the current law was not being complied with today because of the obsolete provisions in the law, and he described a wild card statute promulgated by MR. KIRKPATRICK in the 1980's that would allow the banking department to adopt regulations that over rule a statute. He quoted the statute as saying if the state banks are at a competitive disadvantage with national banks, MR. KIRKPATRICK, by regulation can adopt federal standards to equalize competition to over rule the state standards for reserves; hence, there are no state reserve requirements at the present time. Number 248 SENATOR TAYLOR reviewed his previous concerns, but expressed his hopes the legislation would make it easier for the Department of Banking, Securities & Corporation to maintain some stability and insure better banking institutions. SENATOR TAYLOR entertained a motion to move the bill. SENATOR JACKO moved to pass SENATE BILL NO. 149 (REVISION OF BANKING CODE) from committee with individual recommendations. Without objections, so ordered. SENATOR TAYLOR thanked both MR. KIRKPATRICK and MR. BUSH for their efforts and dedication in working on the legislation. There being no further business to come before the committee, the meeting was adjourned at 2:55 p.m.