HB 170-AK SECURITIES ACT; PENALTIES; CRT. RULES  3:44:55 PM CHAIR CLAMAN announced that the final order of business would be HOUSE BILL NO. 170, "An Act relating to securities, registration, exempt securities, exempt transactions, broker- dealers, agents, investment advice, investment advisers, investment adviser representatives, federal covered securities, federal covered investment advisers, viatical settlement interests, small intrastate security offerings, Canadian broker- dealers, and Canadian agents; relating to administrative, civil, and criminal enforcement provisions, including restitution and civil penalties for violations; relating to an investor training fund; establishing increased civil penalties for harming older persons and vulnerable adults; relating to corporations organized under the Alaska Native Claims Settlement Act; amending Rules 4, 5, 54, 65, and 90, Alaska Rules of Civil Procedure, and Rule 602, Alaska Rules of Appellate Procedure; and providing for an effective date." 3:45:20 PM REPRESENTATIVE LEDOUX moved to adopt Amendment 1, Version 30- LS0333\J.2, Bannister, 4/10/17, which read as follows: Page 34, lines 18 - 19: Delete "by a governmental authority" REPRESENTATIVE FANSLER objected for purposes of discussion. 3:45:28 PM REPRESENTATIVE LEDOUX explained that the amendment deletes the phrase "by a governmental authority" because, she opined, there should be a description of any pending litigation action or proceeding that materially affects the issuer's business or assets, whether or not it was contemplated by a governmental entity, or anyone. REPRESENTATIVE FANSLER withdrew his objection. 3:46:11 PM REPRESENTATIVE EASTMAN objected for purposes of discussion, and noted that he was not sure he understood exactly how expansive it would be when removing that language. He offered a scenario of making a motion to change a bylaw for his political party, and asked how he draws that barrier to make sure it's not too expansive. REPRESENTATIVE LEDOUX responded that if someone sent Representative Eastman a letter that read, "Dear David, We're going to sue you, and we're going to sue you for $1 million." In that scenario, if Representative Eastman was a billion dollar entity being sued for $1 million, possibly it would be no big deal, but if $1 million was other than chump change to Representative Eastman, it would materially affect his business or assets. 3:47:13 PM REPRESENTATIVE EASTMAN asked whether there was some other part of this chapter that had the word "legal" before the word "action" so that an action must be a legal action. REPRESENTATIVE LEDOUX referred to the first portion of Sec. 45.56.310(b)(12). Securities registration by qualification, which read as follows: (12) a description of any pending litigation, action, or proceeding ... REPRESENTATIVE LEDOUX advised that this is boiler plate language. 3:47:46 PM REPRESENTATIVE EASTMAN withdrew his objection. There being no further objection, Amendment 1 was adopted. [CHAIR CLAMAN passed gavel to Vice Chair Fansler.] 3:48:06 PM CHAIR CLAMAN moved to adopt Amendment 2, Version 30-LS0333\J.1, Bannister, 4/11/17, which read as follows: Page 1, line 5, following "agents;": Insert "relating to protecting older and  vulnerable adults from financial exploitation;" Page 62, line 12, following "a": Insert "broker-dealer, investment adviser, or" Page 62, line 14: Following "the": Insert "broker-dealer, investment adviser, or" Delete "promptly" Page 62, line 15, following "administrator": Insert "not later than five days after the broker-dealer, investment adviser, or qualified individual develops the reasonable belief that the financial exploitation or attempted financial exploitation has or may have occurred, or is being attempted, except that the broker-dealer, investment adviser, or qualified individual shall notify adult protective services and the administrator immediately upon confirmation of the financial exploitation or attempted financial exploitation of the covered adult" Page 62, lines 16 - 19: Delete all material and insert: "(b) The requirements of (a) of this section may not be construed to require more than one notification for each occurrence of exploitation or attempted exploitation." Page 62, line 20, following the first occurrence of "a": Insert "broker-dealer, investment adviser, or" Page 62, line 21, following "a": Insert "broker-dealer, investment adviser, or" Page 62, line 22, following "adult": Insert "previously" Page 62, line 23: Following "adult,": Insert "as well as any other person allowed under state or federal law or regulation, or the rules of a self-regulatory organization," Following the second occurrence of "the": Insert "broker-dealer, investment adviser, or" Page 62, lines 26 - 28: Delete all material. Reletter the following subsections accordingly. Page 63, line 9: Delete the second occurrence of "person" Insert "individual" Page 63, line 16: Delete "results" Insert "status" Page 63, line 17, following "administrator": Insert ", and provides additional status updates to the administrator and adult protective services upon request" Page 63, line 18: Delete "(e)" Insert "(d)" Page 63, line 31: Delete "(e), (f), or (g)" Insert "(d) or (e)" Page 64, line 2: Delete "person" Insert "adult" Page 64, lines 4 - 7: Delete all material. Reletter the following subsections accordingly. Page 64, following line 18: Insert a new subsection to read: "(h) A broker-dealer, investment adviser, or qualified individual acting in good faith and exercising reasonable care under (a) - (g) of this section is immune from administrative or civil liability for a notification, disclosure, disbursement delay, or record sharing under (a) - (g) of this section." Reletter the following subsections accordingly. Page 65, line 12: Delete "investment adviser," REPRESENTATIVE KOPP objected for purposes of discussion. 3:48:25 PM KEVIN ANSELM, Director, Division of Banking and Securities, Department of Commerce, Community & Economic Development, explained that the Division of Banking and Securities worked with the industry to create this amendment so the bill would work better for its business practices, and was clearer for the community. This amendment, in and of itself, protects elder and vulnerable Alaskans by requiring the financial industry to report when it believed that financial exploitation was about to take place, or had taken place. It allows the financial industry to hold onto a disbursement regarding a securities trade, for instance, until it was determined there was, or was not, exploitation, she explained. She noted that the two reporting pieces include the Administrator of Securities, Division of Banking and Securities, Department of Commerce, Community & Economic Development (DCCED), and also the Adult Protective Services (APS), Division of Senior and Disabilities Services, Department of Health and Social Services. She offered that in the event those reports are made, the industry, the stockbroker, investment advisor, the advisor's firm, are granted administrative and civil immunity from violation of the act. Immunity is a large piece for industry, she described, and the industry works together with the division to resolve the issue. REPRESENTATIVE KOPP withdrew his objection. There being no objection, Amendment 2 was adopted. 3:50:03 PM CHAIR CLAMAN moved to adopt Amendment 3, Version 30-LS0333\J.4, Bannister, 4/12/17, which read as follows: Page 92, lines 13 - 15: Delete ", a regulation adopted under this chapter, or an order issued under this chapter, except AS 45.56.550 or the notice filing requirements of AS 45.56.330 or 45.56.445," Page 92, lines 16 - 18: Delete "A person convicted of violating a regulation or order issued under this chapter may be fined, but may not be imprisoned, if the person did not know of the regulation or order." REPRESENTATIVE EASTMAN objected for purposes of discussion. 3:51:08 PM CHAIR CLAMAN explained that Amendment [3] was in response to the in-depth and extended discussion during the last bill hearing with regard to criminal violations and issues. He reminded the committee that the concerns expressed involved having a charge that did not include a mental state, and questions about whether it did, or did not, actually create a misdemeanor. During the course of the discussions, the Department of Law offered a potential amendment to delete [Sec. 45.56.670(a), page 92, lines 13-15] to read as follows: (a) ... , a regulation adopted under this chapter, or an order issued under this chapter, except AS 45.56.550 or the notice filing requirements of AS 45.56.330 or 45.56.445. CHAIR CLAMAN explained that deleting the language regarding regulations and orders would not only be satisfactory with the Department of Law, but it would make the last sentence of Sec. 45.56.670(a), lines 16-18 superfluous because it related to regulations and orders. In adopting Amendment 3, he further explained, the language would be more consistent with traditional criminal provisions, and there would not be the issue of regulations that might create a crime that the legislature had not created. 3:52:38 PM MS. ANSELM advised that the Department of Commerce, Community & Economic Development has no objection to Amendment 3. 3:52:53 PM REPRESENTATIVE EASTMAN asked the exact effect this amendment would have on violations of notice filing requirements, and whether that would increase the penalties for someone merely making a notice filing requirement violation. CHAIR CLAMAN opined that this narrows it, as opposed to the range of regulations that could be issued that one would have to show knowledge. Under this amendment, the only issue that could be a basis for a criminal charge would be violations of the statutes. He explained that when "they reference violates this chapter" means Alaska Statutes within Chapter 45, and they would have to show "knowing violation" of those statutes, rather than violations of regulations or orders. It actually narrows the scope of conduct that could be subject to criminal charges, he said. 3:54:13 PM REPRESENTATIVE EASTMAN noted that currently AS 45.56.330 and 45.56.445 include notice filing requirements, and they are currently exempted because there is [page 92, line 14] "except ... or." In the event that exemption was removed, and those are included within this chapter, he paraphrased, "A person who intentionally violates this chapter, including these notice filing requirements is guilty of a class C felony" [page 92, lines 12-15]. He asked whether the intent of the committee is that a simple notice filing requirement violation would now be a felony under Amendment 3. CHAIR CLAMAN related that he did not follow Representative Eastman's question. 3:55:05 PM REPRESENTATIVE KOPP asked, in explaining Representative Eastman's question, the committee to turn to Sec. 46.56.550, and he pointed out that it currently exempts this as being a felony, and paraphrased, "filing of sales and advertising literature." Under Amendment 3, he explained, it takes out this section dealing with advertising to clients and the proper manner in which to advertise. It also removes the filing requirements under AS 45.56.330 and 45.56.445, as those are specifically exempted from being felonies. Representative Eastman had asked whether the intent of the committee was to now make those felonies because the amendment pulls out the exceptions and by default would fall into felony territory. 3:56:46 PM RENEE WARDLAW, Assistant Attorney General, Commercial and Fair Business Section, Department of Law, [audio difficulties] responded that excluding the following language in the amendment, and paraphrased, "except AS 45.56.550, or the notice filing requirements of AS 45.56.330 or 45.56.445" means that a violation of those statutes could result in a class C felony. 3:57:50 PM REPRESENTATIVE LEDOUX commented that she agrees with Representative Eastman and possibly with Ms. Wardlaw, although she was unsure [due to audio difficulties]. Representative LeDoux advised that she had to leave the meeting but would like to see an amendment to Amendment 3. REPRESENTATIVE FANSLER commented that there was no suggestion from Ms. Wardlaw, other than her confirmation that Representative Eastman's point was correct. 3:58:57 PM REPRESENTATIVE KOPP moved to adopt Conceptual Amendment 1 to Amendment 3, for the purpose of not "felonizing" conduct that would become a felony, which is not currently a felony. In order to be consistent moving forward, he suggested that this amendment would keep everything as currently excepted from a felony prosecution, the same as it is currently. In reference to amending Amendment 3, to simply delete [page 1] line 3, "except AS 45.56.550 or the notice filing requirements of AS 45.56.330 or 45.56.445." REPRESENTATIVE FANSLER surmised that Conceptual Amendment 1 to Amendment 3 deletes line 3, "except AS 45.56.550 or the notice filing requirements of AS 45.56.330 or 45.56.445." CHAIR CLAMAN noted he would like input from Ms. Anselm and Ms. Wardlaw as to Conceptual Amendment 1. MS. ANSELM commented that the Department of Commerce, Community & Economic Development is fine with Conceptual Amendment 1, and asked that Ms. Wardlaw speak to the conceptual amendment. MS. WARDLAW advised that the Department of Law has no objection to Conceptual Amendment 1. CHAIR CLAMAN, as maker of the amendment, advised he has no objection to Conceptual Amendment 1. He commented that, interestingly, by deleting "the last sentence of the amendment," the committee was keeping that language in the bill. Consequently, there was a bit of a mirror effect, but he had no objection, he said. REPRESENTATIVE FANSLER noted there being no objection, Conceptual Amendment 1 to Amendment 3 was adopted. 4:02:03 PM REPRESENTATIVE EASTMAN withdrew his objection to Amendment 3. There being no objection, Amendment 3, as amended, was adopted. [VICE CHAIR FANSLER returned the gavel to Chair Claman.] 4:02:36 PM REPRESENTATIVE EASTMAN referred to Amendment 1, noting that the committee removed the parameter that "contemplated as yet unexecuted litigation actions or proceedings by a governmental authority." He asked Ms. Wardlaw, whether it was clear, with this amendment now going forward in the bill, exactly what types of proceedings would be wrapped up in this which were not previously included. MS. WARDLAW responded that the amendment actually expands legal proceedings beyond governmental agencies to include other parties, and at this time the Department of Law has no objection to Representative LeDoux's amendment. REPRESENTATIVE EASTMAN clarified that his question was, what it now includes because the word "contemplated" remains, which means it has not yet happened. He asked what sorts of contemplated things haven't happened yet, actions, proceedings, and such, which now fall under the scope of this statute. MS. WARDLAW answered that "contemplated" would be inclusive of any proceedings that had not yet occurred, such as something under consideration by "this agency," and was not yet at the point of filing a complaint. CHAIR CLAMAN referred to "governmental authority" and explained that it was fairly common, especially in securities settings, for an entity "regulated by these" to receive a letter from the government advising the person they made some errors. The government's "demand letter," or a private entity's demand letter, serves as putting the person on notice that within 30, 60 days, or whatever time period, if the person had not fixed the errors, the government may file civil or criminal action with regard to the violation, or the private entity may file a civil lawsuit. He explained that an entity must take affirmative action in the form of the demand letter giving a party notice that a lawsuit may be filed, in private as well as public actions. MS. WARDLAW advised that Chair Claman was correct. 4:07:23 PM REPRESENTATIVE EASTMAN referred to [Sec. 45.56.670(a), page 92], lines 16-17, and commented that it was simply saying that it is any proceeding to which the issuer is a party. He said that the issuer could be on either side of the action because it did not appear to be limited in any manner. He then referred to line 18, and paraphrased, "any contemplated proceeding," and asked whether the language here limits this so that it only applies when the party is on the receiving end of a litigation action or a proceeding was being contemplated. He further asked whether it would not apply in a case not yet filed wherein someone was going the other direction where proprietary information might be involved, i.e., the fact that they are about to file the lawsuit, and obviously if the lawsuit had not yet been filed there was probably a reason. MS. ANSELM responded "No, it does not affect that," and explained that this is for a registration by qualification which is used in many states. The intent, she explained, is that it does not matter whether a party was on the receiving side or the promulgation side of situation, it needs to be disclosed because if a party is being sued or is suing another party, "it can affect what the value of the securities are, and it should be disclosed." 4:09:57 PM REPRESENTATIVE EASTMAN asked, to whom this information would go to and whether there was adequate protection that no proprietary information would be disclosed to the detriment of the party. MS. ANSELM answered that when registrations come in, until they are final, are considered proprietary, and the issuers are allowed to point out to the division which pieces are proprietary. She offered that it would be kept confidential until it couldn't be kept confidential any longer, and depending upon the situation, it may not be approved for sale in the State of Alaska due to problems with a registration. REPRESENTATIVE EASTMAN questioned that if the information would become public at some point, at what point does it become public, and further questioned whether the fact that someone was contemplating a lawsuit whether that would meet her understanding of proprietary. MS. ANSELM responded that "it would depend on what it was," typically, if there was a problem for the insurer in a securities transaction, the issuer would withdraw the potential offer of securities until the problem was resolved because that is not something they want hanging out there. She pointed out that investors, and the marketplace, do not like uncertainty; therefore, the insurer would probably pull it back, get it resolved, and then move forward. In the event it was a sensitive matter, the insurer would ask the division to keep it cloaked, and under the privacy pieces of the Securities Act, the division can keep the information cloaked, or it can open an investigation and cloak it in that manner. REPRESENTATIVE EASTMAN asked whether it would be cloaked indefinitely. MS. ANSELM answered that it would be cloaked indefinitely for an investigation because those investigatory records are not disclosable. 4:12:16 PM REPRESENTATIVE FANSLER moved to report HB 170, Version 30- LS0333\J, as amended, out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, HB 170(JUD) moved from the House Judiciary Standing Committee.