Legislature(2015 - 2016)HOUSE FINANCE 519
04/13/2016 08:30 AM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| SB170 | |
| HB194 | |
| HB311 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 311 | TELECONFERENCED | |
| + | SB 170 | TELECONFERENCED | |
| + | HB 194 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE BILL NO. 194
"An Act repealing and reenacting the Alaska Securities
Act, including provisions relating to exempt
securities and transactions; relating to registration
of securities, firms, and agents that offer or sell
securities and investment advice; relating to
administrative, civil, and criminal enforcement
provisions, including restitution and civil penalties
for violations; allowing certain civil penalties to be
used for an investor training fund; establishing
increased civil penalties for harming older Alaskans;
retaining provisions concerning corporations organized
under the Alaska Native Claims Settlement Act;
amending Rules 4, 5, 54, 65, and 90, Alaska Rules of
Civil Procedure; and providing for an effective date."
8:48:10 AM
Vice-Chair Saddler MOVED to ADOPT the proposed committee
substitute for HB 194, Work Draft 29-GH1060\G (Bannister,
4/12/16). There being NO OBJECTION, it was so ordered.
BRODIE ANDERSON, STAFF, REPRESENTATIVE STEVE THOMPSON,
explained the changes in the Committee Substitute. He
related that the change corrected language from a
conceptual amendment adopted in the previous committee to
match the intent of the amendment. He delineated that one
correction was located on page 101, line 2 and deleted the
number 19 that was replaced by the number 18. He explained
that the number reflected the age of maturity. In addition,
on page 101, line 5, the words "or disappearance" were
deleted and the words "dementia or Alzheimer's disease"
were inserted.
KEVIN ANSELM, DIRECTOR, DIVISION OF BANKING AND SECURITIES,
DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT,
reported that the legislation was a re-write of the Alaska
Securities Exchange Act and much of the language remained
the same. She provided a brief overview and highlighted the
changes. She outlined that the bill separated securities
statutes from the Alaska Native Claims Settlement Act
(ANCSA) related statutes to reduce confusion and improve
the understanding of both acts. The bill removed the
securities statutes in AS 45.55 and added a new chapter,
45.56. The legislation "synthesized" the Securities Act
with other state's laws by adopting relevant provisions of
the Uniform Securities Act (2002) to make it easier for
businesses, entrepreneurs, and investors to understand
their rights, responsibilities, and opportunities. She
furthered that the bill recognized and incorporated current
securities industry terms and standards. The legislation
opened equity crowd funding opportunities and derailed
investment scams by increasing civil penalties. The
penalties could be used to provide investor, consumer, and
entrepreneurial education via legislative approval.
Finally, HB 194 tripled penalties for offences against
senior citizens or vulnerable adults. She provided
background regarding the securities industry in Alaska. She
reported that by the end of 2015 the state had 1,234
registered broker/dealer firms, however only one firm was
Alaskan. She remarked that Alaska had 765 investment
advisors and only 30 firms were "domiciled" in the state.
In 2015, 90,340 financial sales persons were licensed in
Alaska and less than 1000 were domiciled here. She observed
that the state received 6,600 securities filings each year
and most were from out-of-state. In general, the industry
was compliant with state laws.
Representative Munoz joined the meeting.
Ms. Anslem continued to address the bill. She relayed that
Alaska's security industry paid approximately $13 million
per year in licensing and filing fees and the bill did not
affect the fees. The budget for the division was $3.5
million per year. She informed the committee that the
division investigated and took enforcement action against
securities firms, agents, and issuers, if necessary. In the
last four calendar years the division had taken 54 actions
against securities related firms and sales persons. She
offered that most actions were settled through consent
agreements, and all civil penalties went directly to the
General Fund (GF). The division took default orders against
the six cases that weren't settled. She discussed three of
the unsettled cases to emphasize the importance of the
enforcement actions and passage of the bill. She indicated
that the current maximum fine was only $25,000 per
respondent no matter how many violations were committed.
8:55:46 AM
Ms. Anslem read the following from prepared notes:
13-1095-S, Fortune Oil & Gas, Russell Vera and R.
Gerald Bailey: On February 3, 2014, the Division
issued a Final Cease and Desist Order that included
the MAXIMUM civil penalty of $25,000 against
Respondents for selling over $3.1 million in
unregistered limited partnership interests in Texas
Oil and Gas ventures, mainly to Alaskan investors.
14-1442-S, Global Arena Capital Corp.: On October 23,
2015, the Division issued a Final Cease and Desist
Order that included a civil penalty of $150,000
against Global Arena and six of its employees for
violations of the Alaska Securities Act.
Specifically, an employee of Global Arena contacted an
elderly Alaska halibut fisherman in poor health and
sold him junk bonds, although the investor believed he
was buying something like a CD. The investigation
revealed that the agents were instructed to offer and
sell the junk bonds as "safe investments." The
fisherman invested $27,000 in the bonds, which rapidly
lost value. The firm even attempted to sell the
investor other bonds, including one that would not
reach maturity until the investor was 119 years old.
The investment lost nearly $16,000. Global Arena was
cited for deceptive and misleading representations and
offering unsuitable securities. Currently, the
Division can only get money back for a defrauded
investor with an agreement with a bad actor to pay
restitution directly to the investor. In this case,
the Division successfully negotiated with one of the
respondents to pay restitution to the investor. The
Division may be able to recover some of the penalties
through a SIPC action since the firm is now out of
business.
15-1520-S/15-1520-2-S, Garden State Securities/Garland
James: Garland James, previously an agent at Global
Arena Capital Corp., went to work for Garden State.
He cold-called the same elderly Alaskan fleeced by
Global and tried to sell him $82,000 of a risky
biotechnology stock. When he made the call, James was
not registered as a broker-dealer agent in Alaska.
The Division entered into a consent agreement with
Garden State to withdraw its registration in Alaska
and pay a $25,000 civil penalty (maximum) for failing
to supervise James. The Division issued a Temporary
Cease and Desist Order against James on March 21, 2016
for unregistered activity and for offering an
unsuitable security to the investor, seeking a $25,000
civil penalty.
12-85-S, Troy Stafford and Patrick Williams: Stafford
and Williams formed an Alaska LLC, GS Capital and WS
Seafood. Stafford offered an Alaska resident an
opportunity to invest $40,000 in WS Seafood and
employment. Stafford also stated, falsely, that
another corporation had promised a $10 million loan to
assist the endeavors. The investor invested his money.
The deal fell through and the investor never received
the promised management role. The Division negotiated
a settlement with the respondents, requiring them to
offer rescission to the investor, which respondents
agreed to do and promised to pay, even filing a notice
of rescission with the Division. Respondents never
paid the investor as promised. The Division issued a
Cease and Desist and received a court order to enforce
it.
Ms. Anslem stressed that in regards to the last case; no
statute mandated payment by the perpetrators to the
investor. The current version of the legislation authorized
enforcement. She continued to read the following:
This bill would change the maximum civil penalty per
violation to $100,000. You can see that with the
kinds of cases we are talking about, there would be a
wider range of potential civil penalties. The fines
imposed for the six cases that I mentioned were
$525,000. Under the provisions in HB 194, the
potential fines could have reached over $7,000,000.
Of course, one never knows what can actually be
collected. Accordingly, we can't promise revenues
with any certainty, thus the indeterminate fiscal
note.
9:01:02 AM
Co-Chair Thompson asked about the importance of the
legislature adopting HB 194 during the current session. Ms.
Anslem considered the bill critical. She explained that the
division had worked for a number of years to update the
securities law. She believed the legislation helped with
revenue generation by increasing the civil penalties for
businesses that harm Alaskans.
Vice-Chair Saddler asked what specific sections or elements
of the bill were the most critical. Ms. Anslem replied that
most of the Alaska specific provisions dealt with
exemptions from registration and carried over from the
original act. She pointed out that the state had special
exemptions for certain fishing cooperatives, the Commercial
Fishing and Agricultural Bank (CFAB), and some mining
exemptions. Vice-Chair Saddler asked whether there were
sections or elements of the bill that were "more critical
than the others." Ms. Anslem answered that the enforcement
and crowd funding provisions were critical. She thought
that the provisions that were the least critical were the
exempt security sections: Article 1, 2, and 4, which
remained very similar to the original. She deduced that
another important element allowed the legislature to
allocate up to one third of the funds collected from civil
penalties for consumer and investor education. She revealed
that consumer and investor education was part of the
division's mission but currently was not funded.
9:04:51 AM
Vice-Chair Saddler asked whether there were elements of the
bill that required conformity with federal requirements.
Ms. Anslem replied that there were a number of federal
requirements that had evolved over time but were already
referenced in the law. She elaborated that securities law
was comprised of two components: a federal overlay, and a
"blue sky law" that all states administered. One layer, the
national securities law governed individual investors,
dealers, and financial markets operations. She furthered
that localized securities laws were handled by individual
states. Alaska's laws written in alignment with other
states aided business and investors, which allowed them to
cross state lines and maintain compliance with federal and
state laws.
Vice-Chair Saddler noted that the National Conference of
State Legislatures (NCSL) and the Council of State
Governments issued uniform laws and recommendations. He
asked who produced and administered the Uniform Securities
Act.
RENEE WARDLAW, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF
LAW, ANCHORAGE (via teleconference), answered that the
National Conference of Commissioners on Uniform State Laws
[also known as the Uniform Law Commission (ULC)] drafted
the legislation.
Representative Wilson stated that she had not vetted the
bill. She referred to the provisions on criminal
enforcement that changed "willful" violation to "knowing"
violation and asked for an explanation. Ms. Anslem
responded that the Uniform Securities Act had included the
term "willfully" that meant "intentionally." The
Legislative Legal Services Agency attorney's requested the
change to "knowingly." She clarified that the legal
determination regarding state of mind and culpability in
criminal law (Mens Rea) was hierarchically categorized as
intentionally, knowingly, recklessly, and negligently.
Knowingly was a lesser standard. Representative Wilson
asked for verification that the standard for criminality
was being lowered. Ms. Anslem replied in the affirmative.
She cited AS 11.81.900 as the statute that contained the
language.
9:09:40 AM
Representative Wilson asked whether the division or court
proceedings determined whether violations occurred and
dispensed penalties. Ms. Anslem responded that there were
three different types of actions that could be taken. She
detailed that the first action was administrative taken by
the Department of Commerce Community and Economic
Development (DCCED). The second action was civil taken by
either DCCED or "a private cause of action." The third
action was criminal, taken by DCCED or the state. She
clarified that the department had not taken on a criminal
case to date and the Department of Law (DOL) could take
criminal action if a case arose in a context outside of
DCCED. Representative Wilson surmised that the department
could find someone guilty through an administrative action
and the new provisions could enact penalties up to $100,000
in restitution. She asked whether the department could add
additional fines. Ms. Anslem replied that the civil penalty
would be up to $100,000 per violation although the amount
was typically negotiated on a consent basis. She stated
that restitution was different. She explained that
restitution was usually a repayment of lost money and that
imposing both was possible. Representative Wilson wondered
about the administrative appeal process. Ms. Anslem
answered that an appeal was heard in the Office of
Administrative Hearings and that decisions could be
appealed to Superior Court. Representative Wilson contended
that she had issues with the administrative hearing
process.
Co-Chair Thompson noted that Representative Edgmon had
joined the meeting.
Representative Pruitt wondered what the state could have
done differently for the elderly gentlemen in the case
against Garden State Securities if the new provision in HB
194 had been enacted at the time. Ms. Anslem answered that
the state would have been able to order restitution and
fine the firm for failure to supervise employees. The state
would have been able to take action against every manager
in the firm involved in instructing brokers to mislead
investors. The findings would have led to the amount of
culpability and the fines would have been adjusted
accordingly. Representative Pruitt asked whether Garden
State Securities was registered outside of Alaska. Ms.
Anslem replied that Garden State was a New York firm.
Representative Pruitt asked how the division enforced the
law outside of Alaska and whether enforcement was part of
the uniform law. He asked whether the laws assisted Alaska
to pursue enforcement outside of the state. Ms. Anslem
answered in the affirmative. She detailed the North
American Securities Administrators Association facilitated
states working together via very strong agreements among
each other. She observed that often violations were not
occurring in just one state and joint investigations were
common.
9:16:42 AM
Co-Chair Neuman asked whether the bill created a board or a
committee. Ms. Anslem replied in the negative. Co-Chair
Neuman asked whether any businesses were currently working
in Alaska that would be impacted by the bill. Ms. Anslem
responded that any of the changes in the bill did not apply
to transactions that took place before the effective date
of July 1, 2016. Co-Chair Neuman thought that businesses
were not required to have an Alaska business license to
practice in Alaska. Ms. Anslem replied that the question
was related to the Division of Boards and Professional
Licensing (CBPL) regarding whether a specific business was
required to have a license. She commented that most of the
firms in Alaska did have a business license in the state.
Co-Chair Neuman referred to a "snow bird" carve out. Ms.
Anslem answered that the snow bird carve out applied to
firms that had clients from another state that travelled to
Alaska and permitted the firms to carry out three
transactions without being separately licensed. Co-Chair
Neuman noted that via statute, money received from court
judgements went into the General Fund. Ms. Anslem replied
that HB 194 would not change the statute.
Representative Guttenberg spoke about a letter from Samuels
Yoelin Kantor LLP - Robert Banks dated February 1, 2016
(copy on file) that reported an issue with variable
annuities for customers and brokers. He wondered why
variable annuities were allowed to be sold in the state. He
stated that he could not find the statute AS 45.56.605 (f)
as cited in Mr. Banks letter in the bill or summary of
changes (copy on file). He wondered whether the provision
was deleted. Ms. Anslem replied in the affirmative - it had
been removed from the current version of the bill. She
explained that the Division of Insurance was the primary
regulator of variable annuities, which were federally
considered a security. However, states could regulate
variable annuities depending on what provisions of the
Uniform Securities Act a state adopted. Upon request by the
insurance industry, the division chose not to adopt federal
provisions relating to variable annuities.
9:21:25 AM
Representative Guttenberg noted the importance Mr. Banks
placed on the adopting the provisions. He asked how the
regulations were "being covered" under the Division of
Insurance. Ms. Anslem responded that the Division of
Insurance was and always had been the sole regulator of
variable annuities. Representative Guttenberg asked whether
additional rules should be placed in the bill no matter who
the regulator was. Ms. Anslem replied in the negative. She
thought that the issue required more review and that the
division might revisit the issue. Representative Guttenberg
asked whether there was a history of problems with variable
annuities in Alaska and wondered why the provisions were
being left out of a bill dealing with conforming to
national standards. He remarked that the letter reported
issues related to lack of conformity to national standards.
Ms. Anslem responded that issues around variable annuities
were different in other states depending on the strength of
its regulations. She offered that variable annuities were
regulated on a national level by the Securities Exchange
Commission (SEC) the successor [Financial Industry
Regulatory Authority, Inc. (FINRA)] to the National
Association of Securities Dealers who required licensing.
The department licensed variable annuities brokers through
both the Division of Banking and Securities and the
Division of Insurance. She informed the committee that the
insurance division had the sole authority to regulate
variable annuities under Chapter 21 and provisions under
45.56 would be additional to the insurance division's
regulations. She revealed that the decision had been made
between the Division of Insurance and the insurance
industry to do further study to determine how well the
state was regulating the annuities. Representative
Guttenberg asked whether there was a problem with the sale
of variable annuities in Alaska. Ms. Anslem answered that
there had been complaints, but she did not characterize
them as a problem.
Representative Gattis asked whether there were provisions
in the legislation that were imperative to pass in the
current session. She felt the bill was immense and wanted
to be sure the committee did its due diligence but realized
there were essential "clean-up" provisions that were
necessary.
9:25:43 AM
Ms. Anslem replied that the bill had a number of hearings
through prior committees: House Labor and Commerce and the
House Judiciary Committee. She deemed that the most
important issues were enforcement, civil penalties and
restitution, and consumer education. She expounded that the
issues were about the protection of Alaskans and educating
the public to protect them from "getting ripped off" and
made aware of the resources available. Representative
Gattis acknowledged that there was a lot of cleanup in the
bill that could be done and wondered where emphasis could
be placed. She wanted to know why passage of the bill "was
pressing" in the current session. Ms. Anslem replied that
the bill had been in process for the past 6 years in order
to bring the state in compliance with the most recent act
from 2002 and enable alignment with other states. She felt
that passage of the bill was important for economic
development in the state. In addition, the crowd funding
provisions represented a new opportunity for Alaskans that
authorized investing up to $5000 per year on Alaskan
businesses and start-ups. She noted that SB 126 (Small
Security Offerings) sponsored by Senator Mia Costello dealt
with the issue and was moving through the legislature. She
remarked that the crowd funding provisions were regulated
solely by the state.
9:29:45 AM
Representative Munoz asked about the 90,000 registered
agents. She asked whether the number was unusually large
compared to other states. Ms. Anslem answered that the
number was a larger per capita number than in other states
but not the largest. She indicated that one of the largest
draws was Alaska's higher per capita income and higher per
capita net worth. She believed that without solid
enforcement opportunities the state would continue to be a
target for offences. Representative Munoz asked whether
crowd funding statutes existed in current state law. Ms.
Anslem answered in the negative. She remarked that the only
crowd funding allowed was through internet option like Kick
Starter and the investor did not expect to get a return on
investment. However, with equity crowd funding, returns on
investment or other remunerations were possible.
Representative Munoz asked whether the $5000 was a
cumulative cap. Ms. Anslem answered that the limit was
$5,000 per investment. Representative Munoz asked how
violations were discovered. Ms. Anslem responded that cases
were often referred to the division through federal or
state law enforcement, complaints, the Securities Exchange
Commission, and from a number of other sources such as the
National Association of Securities administrators.
9:33:01 AM
Vice-Chair Saddler noted that the fiscal note did not
include or mention funding for consumer education. He asked
for further information. Ms. Anslem replied that consumer
protection was part of the department's mission. She
provided the example of a $25,000 securities penalty
collected, which allowed for approximately $8,000 to be
deposited into an account under the control of the
legislature who could appropriate the funds for consumer
education and outreach events. Vice-Chair Saddler wondered
how much money could possibly become available. Ms. Anslem
answered that the penalties would have totaled
approximately $7,000,000 and up to one third of the funds
could have been appropriated for consumer education based
on the cases she exemplified, under the maximum fines
established in the bill.
Representative Pruitt asked how long the division had been
working on the bill. Ms. Anslem replied that work on the
bill had been in progress since 2008.
Co-Chair Thompson recalled hearing a version of the bill in
the House Judiciary Committee six years earlier.
Representative Pruitt asked about restitution and how the
issue was addressed in the legislation. Ms. Anslem
responded that restitution needed to be paid before an
action was cleared.
9:37:33 AM
Representative Pruitt asked about the crowd funding
component of the bill. He asked whether the bill mirrored
other states regulation or whether it was adjusted for
Alaska. Ms. Anslem answered that the crowd funding
provisions in the bill were simpler when compared to other
states. The crowd funding was a simple process that helped
get entrepreneurs off the ground. The bill did not require
escrow but required compiling information about the
business but excluded a business prospectus requirement due
to the small population of the state and resulting
transparency. She noted that the cost to require use of a
broker dealer was very high and not included in the
legislation. Her goal was to ensure that the information
about the business provided to the investor was accurate.
The state was considered a "full disclosure" state but not
a "merit" state. Representative Pruitt asked if the bill
ensured crowd funding consumers that "if something went
sideways they would potentially be made whole." Ms. Anslem
replied that it was related to the same provisions she had
already discussed. Representative Pruitt asked about the
mechanism to safeguard that the new business was
legitimate. He asked what elements were in place to ensure
oversight. Ms. Anslem answered that the elements included;
a filing requirement that was scrutinized by securities
examiners, background checks, and Alaska residency. She
characterized equity crowd funding as "Alaskans for
Alaska." Representative Pruitt asked how the division
executed consumer education. Ms. Anslem replied that the
division worked closely with the SEC who provided
presentations and seminars as well as the American
Association of Retired Persons (AARP) and acquired joint
grants through the Investor Protection Trust to produce a
series of 30 minute programs that were broadcast through
KTOO TV on the 360 degree North Channel and reached 250,000
viewers per year. The division participated in all kinds of
community events; small and large.
9:44:00 AM
Representative Wilson wondered what had been the sticking
point on the bill over the past six years to stall
adoption. Ms. Anslem answered that the bill was complex and
the rewrite made the issue appear "bigger" than it was. She
noted that the ANCSA issue was intermixed with securities
and had been a real impediment to updating the securities
act because most of the securities act did not apply to
ANCSA. She believed that separating the statutes would be
beneficial to all parties. Representative Wilson surmised
that the bill sounded good, but she did not know enough
about it. Her biggest concern was related to administrative
hearings versus court hearings. She was concerned about
lowering the threshold for guilt. She asked whether the
industry received notification and had a chance to weigh in
on the bill. Ms. Anslem answered in the affirmative and
pointed to the issue involving variable annuities.
Co-Chair Thompson OPENED public testimony.
Co-Chair Thompson CLOSED public testimony.
Co-Chair Thompson understood the concerns of the committee
based on the bill's large size. He noted that the bill had
been well vetted by two other committees. He spoke to the
fiscal notes and reported that two were zero and the other
for the Department of Revenue was indeterminate but had a
minimal impact. He communicated that the legislation
protected consumers, vulnerable individuals, and provided
for restitution among other benefits. He asked for
discussion regarding reporting the bill out of committee
due to the facts that only several days of session remained
and CCED thought that the bill would be adopted by the
Senate.
9:48:34 AM
Representative Wilson appreciated the Co-Chair's comments
and the consumer protection afforded in the bill. She
understood that the bill had been vetted and she
acknowledged that there was a companion bill in the other
body. However, she wanted more time to answer her concerns
regarding lowering the criminal threshold and to
familiarize herself with all of the provisions in the bill.
Representative Gattis requested more time to look at the
bill in order to gain more clarity.
Vice-Chair Saddler echoed the comments by the previous
speakers and asked for more time to review the legislation.
HB 194 was HEARD and HELD in committee for further
consideration.