Legislature(2015 - 2016)GRUENBERG 120
04/04/2016 01:00 PM House JUDICIARY
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| Audio | Topic |
|---|---|
| Start | |
| HJR29 | |
| HB194 | |
| HB317 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 194 | TELECONFERENCED | |
| += | HB 205 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HJR 29 | TELECONFERENCED | |
| += | HB 317 | TELECONFERENCED | |
HB 194-AK SECURITIES ACT; PENALTIES; CRT. RULES
1:13:26 PM
CHAIR LEDOUX announced that the next order of business would be
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."
1:13:53 PM
KEVIN ANSELM, Director, Division of Banking and Securities,
Department of Commerce, Community, and Economic Development
(DCCED), advised that HB 194 is a complete rewrite of the Alaska
Securities Act based on the model act. She pointed out that
contained within each member packet is a white paper dated
4/5/16, a change summary, a sectional analysis, and a cross-walk
between the current and proposed laws. As a brief overview, she
provided that the Alaska Securities Act as proposed separates
the security statutes from the Alaska Native Claims Settlement
Act (ANCSA) statutes, to reduce confusion and improve
understanding of both Acts, and the securities statutes are
being moved into AS 45.56. The bill also recognizes and
incorporates current securities industry terms and standards.
It synthesizes with other states' laws to make it easier for
businesses, entrepreneurs, and investors to understand their
rights, responsibilities, and opportunities in Alaska. She
offered that Chair LeDoux added an amendment to clarify
disclosure requirements in this section. It opens equity
crowdfunding opportunities to Alaskans, it deters investment
scams using Alaska entities or harming Alaskans by increasing
civil penalties, and providing some of the resources from those
penalties for investors, consumers, and entrepreneur education
as long as that is what the legislature would like to do.
Finally, she said, it enhances penalties against those who would
harm older Alaskans.
1:15:54 PM
MS. ANSELM paraphrased the sectional analysis as follows
[original punctuation provided]:
SECTIONS 1 - 14 (pp. 1-11) include the corresponding
changes to statutes that refer to former AS 45.55
provisions that have been moved to AS 45.56.
MS. ANSELM pointed out that the cross-walk outline gives a
point-by-point analysis, including the legal backgrounds of each
item. She continued as follows:
SECTIONS 15 - 24 (pp. 11-24) modify AS 45.55 as
necessary to delete references to statutes that have
no bearing on the Alaska Native Claims Settlement Act
corporations because of the enactment of AS 45.56.
SECTION 25 (p. 14) Proposed new Chapter AS 45.56
Article 1. General Provisions (pp. 14-15)
Sec. 45.56.105. Securities registration
requirement - same as current law (AS 45.55.070).
Securities must be registered before offer or
sale unless federally covered or specifically
exempt from registration.
Article 2. Exemptions from Registration of
Securities (pp. 15-29)
Sec. 45.56.205. Exempt securities - generally the
same as current law (AS 45.55.900(a)) with a few
additions including securities issued by an
insurance company; certain options, warrants and
rights that are not federal covered securities;
certain cooperatives and equipment trust
certificates.
Sec. 45.56.210. Exempt transactions - similar to
current law AS 45.55.900(b), reorganized with
additions reflecting transactions allowed under
the Uniform Securities Act of 2002 (USA).
Sec. 45.56.220. Small intrastate securities
offerings (referred to as "Crowdfunding") Allows
Alaskans to invest up to $5,000 per person, per
offering, in an Alaskan business. Businesses can
raise up to $1 million per offering and requires
a notice filing with the state and certain
investor disclosures and protections.
1:18:22 PM
MS. ANSELM commented that the following is new, based upon the
Dodd-Frank Act, it prohibits persons who have been subject to
regulatory action or participated in certain crimes from using
exemptions from the registration requirement. Therefore, they
do not get to do the shortcuts and have to do full blown
registration that has all of the information regarding their
past transgressions.
Sec. 45.56.230. Disqualifier - prohibits persons
who have been subject to regulatory action or
participated in certain crimes from using
exemptions from the registration requirement.
Sec. 45.56.240. Waiver and modification broadens
the administrator's authority to waive or change
requirements or conditions for exemptions.
Sec. 45.56.250. Denial, suspension, revocation,
condition, or limitation of exemptions - same as
current law, although the appeal rights and
hearing information is moved to Article 6.
1:19:10 PM
MS. ANSELM explained that the Act is organized by sections so it
is easier for people to locate what they are looking for,
whether a practitioner, an issuer of securities, or a consumer.
Article 3. Registration of Securities and Notice Filing of
Federal Covered Securities. (pp. 29-42)
No significant changes to registration provisions
from AS 45.55. Material changes are noted by
section.
Sec. 45.56.305. Securities registration by
coordination - registration statement must be on
file with the Administrator for 20 days unless
reduced by regulation. 10 days is the current
requirement. References to prompt notice by
telegram are deleted.
Sec. 45.56.310. Securities registration by
qualification - adds a new requirement that
registrants disclose pending litigation that may
materially affect the issuer or litigation that
is known to be contemplated but not yet filed.
Sec. 45.56.320. Securities registration filings -
allows the administrator to set escrow time by
regulation or order for certain securities issued
to a promoter or to other persons at a price
substantially less than the public offering
price.
Sec. 45.56.330. Notice filing of federal covered
securities - adds the imposition of fees for late
filings
1:21:10 PM
MS. ANSELM explained that these federal covered securities are
regulated by the Securities Exchange Commission, but there was
provision in the federal act that says the entity must also let
the state know that it is operating in their state. Currently,
she pointed out, the only way the state can affect an issuer
failing to file with the state is to issue a Cease and Desist
Order. She described this as somewhat draconian in that the
Division of Banking and Securities would prefer the entity pay a
fee and if the entity has to pay a fee once or twice it won't be
late any longer. Ms. Anselm continued:
Sec. 45.56.340. Viatical settlement interests -
combines current AS 45.55.120 and AS 45.55.905(c)
to explain the joint regulation of these
interests by the Securities and Insurance
statutes.
Sec. 45.56.350. Waiver and modification -
administrator allowed waiver authorities are
consolidated in this section instead of
throughout the chapter.
Sec. 45.56.360. Denial, suspension, and
revocation of securities registration - adds
requirement to establish regulations explaining
what conduct may be fraud upon purchasers;
unreasonable discounts, compensation, profits
(including options, etc.) and terms that are
unfair, unjust or inequitable.
Article 4. Broker-dealers, Agents, Investment
Advisers, Investment Adviser Representatives, and
Federal Covered Investment Advisers. (pp. 42-66)
covers the firm salesperson, and adviser registration
(licensing) provisions are reorganized into one
article, making it more user-friendly than current
law. Notable changes are listed below.
Sec. 45.56.405. Broker-dealer registration
requirement and exemptions - includes a new
"snowbird exemption" to facilitate ongoing
broker-customer relationships with customers who
have established a second or other residence and
clarifies the number of transactions a broker-
dealer may effect annually (3) if not registered
in Alaska.
Sec. 45.56.410. Limited registration of Canadian
broker-dealers and agents - changed annual
renewal to December 31 from December 1 for easier
state and firm processing.
Sec. 45.56.420. Registration exemption for merger
and acquisition broker - this new provision
exempts mergers and acquisitions brokers from
registration (licensing) requirements because
these transactions are typically between knowing
parties with adequate legal counsel and scrutiny.
The exemption is not available if the broker
actually handles the securities exchanged in the
transaction or otherwise represents an issuer or
public shell company, or is subject to a
Securities and Exchange Commission action.
Sec. 45.56.430. Agent registration requirement
and exemptions - the rewrite of this section
includes a statement of the types of business
covered here instead of in a definitional
section.
Sec. 45.56.435. Investment adviser registration
requirement and exemptions - includes a new
"snowbird" exemption that mirrors the broker-
dealer exemption in Sec. 45.56.405.
Sec. 45.56.440. Investment adviser representative
registration requirement and exemptions - these
provisions mirror the broker-dealer agent
requirements in Sec. 45.56.430.
Sec. 45.56.445. Federal covered investment
adviser notice filing requirement - these
provisions are not separately stated in the
current law.
Sec. 45.56.450. Registration by broker-dealer,
agent, investment adviser, and investment adviser
representative - combines provisions in current
statute and regulations and extends the automatic
registration from 30 to 45 days unless the
registration is denied.
Sec. 45.56.455. Succession and change in
registration of broker-dealer or investment
adviser - clarifies that an organizational change
can generally be completed by amendment instead
of a new registration (for instance a sole
proprietorship moving to a limited liability
company).
Sec. 45.56.460. Termination of employment or
association of agent and investment adviser
representative and transfer of employment or
association - requires the registrant file a
notification with the division. Allows for an
immediate temporary effective registration with a
new firm when there is no new disciplinary
information added.
Sec. 45.56.465. Withdrawal of registration of
broker-dealer, agent, investment adviser, and
investment adviser representative - extends the
effective date of registration withdrawal up to
60 days and allows a revocation proceeding to
commence within one year.
Sec. 45.56.470. Filing fees - are established and
may be paid through a designee by regulation.
1:26:53 PM
MS. ANSELM explained that similar to many industries across the
country there are now national data bases. One is the Central
Registration Depository for all of the broker-dealers and their
agents, and since the state has over 1200 broker-dealers and
over 92,000 sales persons it is helpful to have the national
registry since most of those are located out-of-state. She
offered that it is easier for them to apply and easier for the
state to manage. Ms. Anselm continued:
Sec. 45.56.475. Post registration requirements -
in addition to current requirements, adds the
provision for continuing education by regulation.
Sec. 45.56.480. Denial, revocation, suspension,
withdrawal, restriction, condition, or limitation
of registration - in addition to current
provisions, allows the administrator to bar
registration and includes for actions taken by
other regulators. Civil penalty for
registrants is increased from $2,500-$10,000 per
violation to up to $100,000 per violation.
1:28:01 PM
MS. ANSELM explained the first portion of Sec. 45.56.480 by
using the example that the discipline is that the entity cannot
be licensed in Alaska any longer, or in some cases, ever. Ms.
Anselm continued:
Article 5. Fraud and Liabilities. (pp. 66-69)
Sec. 45.56.505. General fraud - same as current
AS 45.55.010.
Sec. 45.56.510. Prohibited conduct in providing
investment advice - allows administrator to
define prohibited conduct by regulation.
Sec. 45.56.520. Misleading filings - same as
current AS 45.55.160.
Sec. 45.56.530. Misrepresentations concerning
registration or exemption - same content as AS
45.55.170.
Sec. 45.56.540. Evidentiary burden - same content
as AS 45.55.900(c).
Sec. 45.56.550. Filing of sales and advertising
literature - same content as AS 45.55.150.
Sec. 45.56.560. Qualified immunity - registered
persons are not liable to other registered
persons, under state defamation laws, for
statements contained in disclosure records
required to be filed with the administrator for
purposes of licensing and potential discipline.
This provision encourages full disclosure to the
administrator.
Article 6. Administration and Judicial Review. (pp.
69-89)
Sec. 45.56.605. Administration - adds a new
provision allowing the administrator to develop
and implement investor education initiatives and
accept grants or donations for investor
education.
1:29:46 PM
MS. ANSELM related that there are many scams going on out there
and not only does the state need to increase its enforcement
activities and make it less profitable for firms to rip off
Alaskans, the state also needs to give tools to its investors to
understand what is out there and what they need to watch for.
Currently, there is nothing budgeted for that purpose. Ms.
Anselm continued:
Sec. 45.56.610. Administrative files and opinions
- requires the administrator keep records
according to a retention schedule and outlines
publicly disclosable documents.
Sec. 45.56.615. Public records; confidentiality -
clarifies and specifies record confidentiality.
Sec. 45.56.620. Uniformity and cooperation with
other agencies - expands opportunity for
cooperation and sharing with governmental units,
regulatory organizations for collaborative
efforts including regulation, enforcement and
coordination to reduce the burden of raising
capital by small business.
Sec. 45.56.625. Securities investor education and
training fund - creates a securities and investor
education and training fund within the general
fund to provide funds for investor education. 33%
of the money received from civil penalties may be
used for investor education and training if so
appropriated by the legislature.
Sec. 45.56.630. Service of process - same as
current AS 45.55.980.
Sec. 45.56.635. Applicability of the chapter -
same as current AS 45.55.980.
Sec. 45.56.640. Regulations, forms, orders,
interpretative opinions, and hearings - combines
existing AS 45.55.950 and 45.55.970 and clarifies
that GAAP compliant financial statements may only
be required as allowed by federal law.
Sec. 45.56.645. Investigations and subpoenas -
similar to existing AS 45.55.910 and allows
broader cooperation with other regulators.
Sec. 45.56.650. Administrative enforcement - time
period for a respondent to request a hearing
after an action is taken is extended from 15 days
to 30 days. Civil penalties are increased from
$2,500 for a single violation and $25,000 for
multiple violations to a maximum of $100,000 for
a single violation with no cap for multiple
violations. If a victim is an "older person" (a
person over 60 years old), the respondent is
subject to treble damages. Restitution and actual
costs of investigation may be ordered. The
administrator may deny the use of securities
exemptions under Article 2 and registration
(licensing) exemptions under Article 4 if a
person violates the Act. The administrator may
petition the Superior Court to enforce a final
order and the Court may hold a person in contempt
for violating an order of the administrator,
punishable by up to $100,000 per violation, in
addition to any administrative penalties that
were originally assessed.
Sec. 45.56.655. Civil enforcement - the
administrator may seek remedies such as asset
freezes, an order of rescission, restitution, and
civil penalties of up to $100,000 per violation,
and all damages may be trebled if the victim is
an "older person" (person over 60 years of age).
Sec. 45.56.660. Civil liability - outlines
instances where the seller is liable to the
purchaser and potential remedies (actual damages
including interest as determined by the court);
also describes instances where the buyer may be
liable to the seller.
Sec. 45.56.665. Rescission offers - outlines the
rescission offer process, including a new
requirement that the offeror must demonstrate the
ability to pay and then actually pay as promised.
Sec. 45.56.670. Criminal enforcement - knowing
violations of the Act and fraud are punishable as
class C felonies punishable under AS 12.55.125.
Unknowing violations are punishable as class A
misdemeanors and fine of not more than $100,000.
Individuals who alter or destroy evidence are
guilty of a class C felony and a fine of not more
the $500,000 or both.
Sec. 45.56.675. Judicial review - appellants have
30 days to request review of a final order.
Article 7. Miscellaneous and Additional General
Provisions. (pp. 89-100)
Sec. 45.56.710. Reimbursement of expenses
incident to examination or investigation - same
as AS 45.55.915.
Sec. 45.56.720. Electronic records and signatures
- facilitates filing of electronic records and
signatures. Consumers must consent and have the
option to withdraw such consent.
Sec. 45.56.730. References to federal statutes -
a list of all federal statutes referenced in the
Act.
Sec. 45.56.740. References to federal agencies -
notes that a reference to an agency of the United
States is also a reference to a successor agency.
Sec. 45.56.900. Definitions.
- Updates federal citations
- New definitions include:
Disqualifier
Filing
Institutional investor (reflects federal
law)
Insurance company
Insured
International Banking Institution
Offer to purchase
Older person - a person that is age 60 or
older (from AS 47.65.290(6))
Price amendment
Record
Self-regulatory organization
Sign
Sec. 45.56.995. Short title. This chapter may be
cited as the Alaska Securities Act.
SECTIONS 26 - 28 (pp. 101-105). Citations are modified
to reflect Chapter 45.56 in place of
Chapter 45.55 references; federal law citations
are updated.
SECTION 29 (p. 105) - Repeals statutes that are no
longer needed in AS 45.55 because they do not apply to
Alaska Native Claims Settlement Act corporation proxy
solicitations.
SECTION 30 (p. 105) - Amends indirect Court Rules
relating to changes in AS 45.56.
SECTION 31 (pp. 105-106) - Allows the department to
adopt transition regulations.
SECTION 32 (pp. 106-107) - Amends the law to effect
transition and application of AS 45.55 for existing
proceedings, existing rights and duties.
SECTION 33 (p. 107) - Reviser's instruction to rename
AS 45.55 to Alaska Native Claims Settlement Act
Corporations Proxy Solicitations and Initial Issuance
of Stock.
SECTION 34 (p. 107) - Conditional effect of certain
provisions upon constitutionally required vote of each
house.
SECTION 35 - July 1, 2016 effective date
1:37:26 PM
MS. ANSELM mentioned that the Division of Banking and Securities
is not aware of any opposition to the bill, originally there
were concerns from the insurance industry that have been
resolved. A fiscal impact is not expected, she noted, and there
may be some increased revenue with the enforcement and civil
penalties being increased but it cannot predict enforcement
actions with any certainty.
CHAIR LEDOUX asked whether the members understood the testimony
because if they didn't, Ms. Anselm gives an excellent tutorial.
She noted that she heard the bill four times in the House Labor
and Commerce Standing Committee and suspected that Ms. Anselm
spent four to eight hours in her office just with Chair LeDoux.
MS. ANSELM commented that it was her pleasure.
1:38:56 PM
REPRESENTATIVE CLAMAN asked Chair LeDoux her current thought as
far as plans for the bill.
CHAIR LEDOUX related that the committee certainly isn't going to
hold it for a few weeks, and it will move the bill at the
pleasure of the committee to give the members an opportunity to
review the bill with Ms. Anselm.
1:39:46 PM
REPRESENTATIVE FOSTER asked what questions came out of the House
Labor and Commerce Standing Committee that may be relevant for
the House Judiciary Standing Committee.
MS. ANSELM responded that there were a number of questions as to
why the state is increasing the civil penalties as much as it is
and, she said that primarily $25,000 does not appear to be much
of a deterrent. She then turned to the last page of the white
paper "13-1095-S Fortune Oil & Gas," and related that these
people recently came from Texas and sold about $3.1 million
worth of worthless securities to Alaskans, and to people outside
of Alaska. The largest amount the state can tag that group is
$25,000 which is the cost of doing business if, in fact, they
elect to pay it. In this case they elected not to pay and the
division is going to court over it because it doesn't want them
to get away with those actions. Yes, she commented, there is an
opportunity for the claimants, who are out a lot of money, to
file against Fortune Oil & Gas and go through the court system
which, in this case, they are doing. She commented that the
state also has established broker-dealers coming in, such as a
New York broker-dealer that ripped off [Mr. Burke], an elderly
halibut fisherman in poor health because he answered his phone
to a cold call. The fisherman thought he was buying CDs in a
Canadian bank and, in fact, he was buying junk bonds and lost
approximately $17,000. Although the division was able to
retrieve his loss through an agreement with the broker-dealer,
but that broker-dealer could only be fined $25,000 for his
actions. The division is aware that activity was going on and,
in fact, it is so bad that that broker-dealer, as it was going
out-of-business, apparently sent its cold call list out with the
representatives they were dismissing. Interestingly, the
division received a telephone call from Mr. Burke advising that
another representative of another firm tried to sell him
something else, but it is only if the division can get out to
people and let them know to call the division that some of it
can be stopped.
1:42:30 PM
MS. ANSELM related that most of the questions have revolved
around the high enforcement penalties. She offered that the
division does negotiate a lot of the securities issues that it
finds. Some are inadvertent, some people didn't pay enough
attention to what they were doing in the securities laws and
made some mistakes. The division will usually consent those out
with a lower penalty and she doesn't expect that to change
because the division is not out for blood. Although, the
division it is out to get people that do not belong in the
industry in the State of Alaska out of Alaska.
1:42:59 PM
CHAIR LEDOUX asked whether this increased the criminal
penalties, the felony threshold change or anything of that
nature.
MS. ANSELM deferred to the Department of Law.
1:43:41 PM
RENEE WARDLAW, Assistant Attorney General, Commercial and Fair
Business Section, answered that the changes to the criminal
penalties actually clarified some of what the penalties would
actually do. She offered that her section does not do much
criminal work currently but in the event it did want to take
criminal enforcement, the changes to this bill clarify that
notion. She noted that she had confirmed that with the
Department of Law's Legislation and Regulations Section and it
is quite comfortable in moving forward in that regard.
CHAIR LEDOUX referred to the word "clarify," and related she is
trying to put it into the context of the criminal law reform
bill, HB 205. She explained that that bill changes felony
threshold levels with the smart justice idea, and reiterated she
would like to know how this might gel with HB 205.
MS. WARDLAW responded that it did not, in fact, increase any
sort of misdemeanor penalties to go to felonies. She opined
that HB 205 does not, in any manner, conflict with the changes
proposed in HB 194.
1:45:47 PM
REPRESENTATIVE KREISS-TOMKINS noted Ms. Anselm had mentioned
that some of this is motivated from work originating with
Uniform Act. He asked whether she could highlight where this
legislation diverts from Uniform Act recommendations, and what
are the Alaska specific provisions.
MS. ANSELM responded that most of the Alaska's centric
provisions are related to the types of registration exemptions,
there are certain things for minerals, oil & gas, and some of
the fishing cooperatives. She said she will highlight them
within the cross-walk contained within the packets.
CHAIR LEDOUX clarified that Ms. Anselm will highlight the
provisions in this bill that differ from the Uniform bill for
this committee.
MS. ANSELM agreed.
1:47:08 PM
REPRESENTATIVE KREISS-TOMKINS referred to AS 45.56.655, Civil
Enforcement, and asked the motivation for treble damages for an
older person. He further asked whether there had been any
thought of expanding that class for particularly vulnerable
citizens to disabled or mentally disabled people.
MS. ANSELM said yes, there is been a national push to do exactly
that. The division has not proposed amendments in that regard
but would be pleased with any amendment offered. She noted she
could provide the national model to the committee because it was
released less than one month ago.
REPRESENTATIVE CLAMAN referred to the Uniform Act and asked how
many other states have adopted the Uniform Act at this point.
MS. ANSELM deferred to Kristy Naylor, Division of Banking and
Securities.
1:49:01 PM
KRISTY NAYLOR, Chief of Enforcement and Securities, Division of
Banking and Securities, Department of Commerce, Community, and
Economic Development (DCCED), advised that 26 states have
adopted the 2002 Uniform Act, and opined that it recently went
to 27 states when the State of Wyoming adopted it within the
last month.
REPRESENTATIVE CLAMAN referred to the issue of protections for
the elderly and disabled and asked whether it is something that
has now been approved by the Uniform Law Commission or something
that is coming from a different group.
MS. ANSELM responded that it is coming from the North American
Securities Administrators Association, an association with a
number of other organizations. No, she said, it has not gone
through the model act process yet.
REPRESENTATIVE CLAMAN asked whether she knew whether the Uniform
Law Commission is actually looking at it, or whether it is too
early for them to get involved.
MS. ANSELM replied that she does not know.
CHAIR LEDOUX asked whether she would be able to find out.
MS. ANSELM responded that she does not know the answer but will
check.
1:50:30 PM
REPRESENTATIVE MILLETT asked whether this fraud is becoming more
prevalent in the state because money is being put toward
education. She further asked whether the division is expecting
a larger reporting of people being fleeced.
MS. ANSELM responded yes, Alaska's per capita income is high;
therefore, Alaskans are automatic targets for a number of the
scammers. She pointed out that it is not only increasing in
Alaska, it is increasing everywhere and the aging population is
generally the population that has a few dollars and is concerned
about having those dollars last throughout a longer lifetime.
Unfortunately, people retire or get close to retirement and are
afraid they will not have enough money to live the long life
they now expect to live and take chances, which is where
education comes in. People do not want to appear uninformed and
do not always want to question people as to their [fraudulent]
motives or what the security really is, so the division wants to
give people tools to be able to respond, ask the right
questions, and have the resources. The division offers
education on its website, it offers investor education programs
in coordination with AARP with other divisions, the Securities
Exchange Commission came to Alaska and offered outreach, and the
division has been performing outreach as it can. She advised
that the division would like to dedicate more resources to those
programs and it only makes sense to use some of the monies that
come from ill-gotten gains to give back to the community.
1:52:32 PM
REPRESENTATIVE MILLETT asked the annual average collection of
fees.
MS. ANSELM pointed to a document in the record and on the
division's website, which may not have been printed out for the
members' packets, and described it as a multi-colored document
that represents all of the securities actions that have been
taken from 2012 - present. She explained that a number of these
were done by consent and she is not including those in the fines
collected. The fines imposed not on a consent basis are
$525,000, the potential i.e., not on a consent basis. Although,
going to the new maximum would be over $7 million, and all of
these are the kinds of cases discussed with Fortune Oil & Gas
and Global. She offered that as part of potential restitution
out of that would be $3.4 million. Substantial money could be
collected from these large firms that don't want to pay
attention to the correct manner of doing business, she said.
1:53:55 PM
REPRESENTATIVE MILLETT surmised that Alaska is falling in line
with the other states that have increased their penalties
upwards to $100,000, and asked whether there is a national scale
of standard fines.
MS. ANSELM replied that she was unaware there was an actual
average she could quote because it does change, and many of the
states have different methods of accessing penalties. Alaska is
fairly straight forward, she commented, and some states have a
more complicated schedule. Although, $100,000 appears to be a
medium sort of fine, she said.
1:54:43 PM
REPRESENTATIVE MILLETT pointed to her testimony regarding cold
calls and asked where people are obtaining the lists of Alaska's
seniors and vulnerable adults that may have a bit of disposable
income and are trying to secure their future.
MS. ANSELM responded that people can buy the lists or buy lead
generators, or people's names get put on lists because they
signed up for something, or they went to a seminar, or any of a
number of things, and the lists are then refined and sold to
other people in the business. She described it as the "seamy
side of the securities business" and this has been around since
"blind em and rob em," such as Blinder, Robinson & Company. She
explained there were a number of firms in the mid-to late 1980s
that did a lot of the cold calling and penny stock "pumping and
dumping."
1:56:04 PM
CHAIR LEDOUX expressed concern regarding AS 45.56.665 rescission
offers, and stated she was to be certain that simply because a
rescission offer was made, and accepted, and the issuer actually
did what they promised, that this doesn't wipe out any common
law remedies possibly available in order to sue for fraud or
misrepresentation or whatever. She asked Mr. Julius Brecht and
Mr. Robert Banks the same question.
REPRESENTATIVE CLAMAN asked the definition of a rescission
offer.
1:57:18 PM
MS. ANSELM turned to the cross-walk "Comparison of HB 194 CS N
to Existing Alaska Securities Act (AS 45.55)," page 92, Sec.
45.56.665 and advised it outlines the rescission offer statute
and discusses rescission offers on the right-hand side of the
page. She explained that a rescission offer is basically an
offer to undue the wrong that has been done; therefore, if
someone buys a security and there was a problem with that
security, the rescission offer comes into play when the seller,
in this case, of the security says they will give the buyer
their money back if the securities are returned plus interest.
Basically then, there is no other provision the state can use to
go after anything else because the rescission offer takes care
of it. She advised that rescission offers come into play not
just if there is a security problem with the company, in that
most often Alaska has seen rescission offers to correct the
title on a corporation. In other words, a corporation should
have registered the security with the division or somehow the
division does not have a clean title of that security and the
entity cannot then sell it later, it is not eligible for merger
and acquisition, and no one wants to touch the company until
it's been reorganized. With a rescission offer "you can clean
that title" which, she reiterated, is what rescission offers are
used for in Alaska.
MS. ANSELM turned to the bottom of page 2 of the white paper
"Alaska Securities Act CSHB 194/N, House Judiciary Committee,
April 4, 2016," pointed to the "12085-S, Troy Stafford and
Patrick Williams" and related that Troy Stafford offered
rescission to an investor who had invested $40,000 in one of his
projects, and Mr. Stafford agreed to make it right and he would
return the $40,000. Mr. Stafford offered to make the
rescission, the rescission offer went through the division
because it vets those, and he never paid. That is why the law
changed that says not only does the entity have to offer it but
they have to actually pay the person, otherwise everything is
off and the person is back to taking whatever civil action. The
division, in fact, took an order against Mr. Stafford and his
partner regarding them, she said.
2:00:28 PM
MS. ANSELM returned to the white paper [page 92], and referred
to Sec. 45.56.660(m) Civil Liability, which read as follows:
(m) The rights and remedies provided by this
chapter are in addition to any other rights or
remedies that may exist, but this chapter does not
create a cause of action not specified in this section
or AS 45.56.475(e).
MS. ANSELM explained that common law is not specified in this
section and commented that that is the primary question Chair
LeDoux posed. She noted that the division's practitioners may
clarify that further since they are out in the real business and
she is on the regulatory side.
2:01:16 PM
REPRESENTATIVE KREISS-TOMKINS referred to [page 76 of the white
paper] Sec. 45.56.625 which read as follows:
The securities investor education and training fund is
created as a special fund in the general fund to
provide funds for the purpose specified in
45.56.605(d). The legislature may appropriate 33
percent of the money received by this state from civil
penalties under this chapter into the fund for
securities investor education and training. Nothing
in this section exempts money deposited into the fund
for the requirements of AS 37.07 (Executive Budget
Act) or dedicates money for a specific purpose.
REPRESENTATIVE KREISS-TOMKINS asked whether changing penalties
and anticipated increased revenue over present will increase
more than 33 percent, thereby, creating a no net loss if money
was diverted into investor education.
2:01:52 PM
MS. ANSELM agreed, and she pointed out that those are the
figures she gave earlier, where the difference between the fines
the division issued on non-consent final orders were so
dramatically higher that the division does believe it would be
higher, such as 66 percent as opposed to the 33 percent. She
reiterated that 100 percent goes to the general fund and it is
only if the legislature decides to spend some of that for
investor education, it would merely be in a separate line and
only the legislature would have control over that. The division
would come then go the legislature each year and advise that it
would like to spend "this much" out of the investor education
area with the legislature having control over the entire amount.
2:03:22 PM
JULIUS BRECHT, Of Counsel, Law Offices of Bankston, Gronning and
O'Hara, advised the committee of his legal experience in that he
has been of counsel associated with the Law Offices of Bankston,
Gronning and O'Hara since the beginning of 2015, prior to that
he was senior shareholder for over 30 years in another law firm
in Anchorage, past director of the Alaska Division of Banking
and Securities, and prior to that was an assistant attorney
general with the Alaska Department of Law. He offered that
subsequent to leaving the Alaska Division of Banking and
Securities at the end of 1980, he has been in private practice
in Anchorage concentrating on state and federal securities law,
corporate finance, financial institution law, and business law.
Within this practice he has represented clients before the
Securities and Exchange Commission, the National Association of
Securities Dealers, the Nasdaq Stock Markets, and state
securities regulators including the Alaska Administrator
Securities. In addition, he said he has advised persons on
issues relating to securities offerings, broker-dealer
investment advisor and agent issues before the Alaska Division
of Banking and Securities. He prefaced his comments on HB 194
by stating that these are solely his comments and not the
comments of the Law Offices of Bankston, Gronning and O'Hara, he
said.
2:05:30 PM
MR. BRECHT explained that the Alaska Securities Act has served
the state and the Alaska investing public well through the
years. The current Act is based upon the Uniform Securities Act
of 1956, and when Alaska became a state in 1959 it was one of
the first states to adopt the model act. Subsequently, a modest
amount of case law has been generated with several Alaska
Supreme Court opinions along the way. In the meantime, the
Uniform Act has undergone several revisions, the most recent
revision published by the National Conference of Commissioners
on Uniform State Laws in 2002. As stated earlier, approximately
27 other states have replaced their securities laws with the
2002 Act. The bill before this committee is legislation to
repeal and reenact the Alaska Securities Act in the form of the
2002 Uniform Act, and by replacing the Alaska Securities Act
with the 2002 Act Alaska will be able to stay in step with those
other states who have adopted the model act as well. That is,
Alaska is a great place to live in many ways, its beauty,
resources, and people; however, its securities market place is
rather modest in size and development which means that
opportunities to interpret its securities laws are limited. A
natural place to look for interpretation of language in the
current Alaska Securities Act is to the securities laws of other
states also subscribing to the 1956 Model Act. Since more
states are repealing and reenacting their securities laws based
on the 2002 Model Act, Alaska will soon find itself in a smaller
and smaller base to seek out those interpretations. It is
therefore a reasonable step to seriously consider the 2002 Model
Act. He noted that in considering the Model Act, the real
strength of the model is to adopt it with as few changes as
possible so that one can look to other jurisdictions in
interpreting its terms. One example of this caution to
uniformity comes up in the context of Sec. 45.56.660, civil
liability, in HB 194. It states that the rights and remedies
provided by the Chapter, meaning the Alaska Securities Act, are
in addition to any other rights or remedies that may exist. He
opined that the clear meaning of this subsection is that it is
supplemental to any other rights or remedies that may exist. He
suggested that the way to emphasize this point may be through
creating a legislative history on the section. He noted that
while listening to other testimonies it occurred to him that in
times past, the question of whether to use the Alaska Securities
Act as a means for proving fraud or using common law fraud would
come up from time to time when he was director of the Division
of Banking and Securities. He said he could not recall that the
concern was whether the Securities Act in some way prevented
someone from going in another direction, but rather why would
they ever want to go anyplace other than in the Alaska
Securities Act because proving fraud under the securities laws
is easier, relatively speaking, to proving common law fraud. He
then harkened back to his initial statement that he believes the
language is supplemental to any other right that the person may
be able to seek out under Alaska law, he said.
2:09:54 PM
CHAIR LEDOUX pointed to Sec. 45.56.665 and surmised that if the
rescission offer is made and actually paid, that that precludes
an injured party from an action under Sec. 45.56.660, but does
not preclude any action they may have under common law.
MR. BRECHT returned to the previous comments regarding
rescission and offered that in his practice whenever there was a
violation of the Alaska Securities Act, typically in the context
of failure to register an offering, that rescission was a way to
satisfy that failure to register. Thereby, moving forward by
offering the existing investors the opportunity to opt out of
the investment and get their money back plus interest. He
explained that the intent of that was to get beyond that
violation of the Alaska Securities Act moving forward,
typically, with doing another offering that would either be
registered or pursuant to an exemption. In that context, the
rescission was treated as more of a contract between the issuer
and the investors that they would waive their rights to any
further action against the issuer. He offered that that is one
line of thought, another are the provisions of Sec. 45.56.660(m)
which on its face says that the provisions of this Act do not
prevent one from exercising other rights they might have at law.
2:12:33 PM
CHAIR LEDOUX pointed to a scenario of someone cold calling a
salmon fisherman who advises the caller that he is thinking
about buying Microsoft stock. The cold caller then convinces
the fisherman to instead buy the junk bond, and a couple of
weeks later Microsoft stock went up and the junk bond is
worthless. Chair LeDoux pointed out that giving the fisherman
the $10,000 through rescission he put into it does not
compensate him for the damages he actually incurred. She
explained that if it hadn't been for the fraudulent cold
caller's advice, the fisherman would have bought the Microsoft
stock and rather than his investment being worth $10,000, it may
have been worth $20,000. In that scenario it does not appear as
though the fisherman necessarily needs to accept the rescission
offer to eliminate the liability under Sec. 45.56.660. She said
she wanted to be certain that any suit the fisherman has for
damages he incurred by not investing in Microsoft stock, that
they are not eliminated by this section.
2:15:03 PM
MR. BRECHT offered that when he has been presented with a
rescission situation he would advise the client, in wanting to
get a clean break here, that the investor waive all rights in
entering into that rescission.
CHAIR LEDOUX asked why the investor should waive all rights if
Mr. Brecht is trying to protect the investor. In the event he
was representing the cold caller he would obviously want them to
waive all rights, but it wouldn't be in the investor's best
interest to waive.
MR. BRECHT explained that he would be representing the issuer,
who had advised they had a problem with the division, and they
would go through a rescission offer process. Currently, there
is a clear statement in the statute where there is an exemption
to follow certain steps in the rescission. He offered that in
representing the issuer and trying to make the problem go away
is to try to get the investors, in return for getting their
money back ...
2:16:52 PM
CHAIR LEDOUX interjected that she does not want to represent the
issuer, but rather represent the investor.
MR. BRECHT responded that the investor would not enter into the
rescission.
CHAIR LEDOUX opined that she may be missing something that ...
MR. BRECHT interjected that there is no requirement that an
investor enter into a rescission agreement with the issuer
because the investor can simply sue the issuer, if they prefer.
CHAIR LEDOUX advised she would research this issue further.
2:18:05 PM
ROBERT BANKS, Attorney, Law Offices of Samuels, Yoelin, Kantor,
advised he has been a lawyer for 34 years, and during the last
32 years has concentrated in securities litigation and
approximately 95 percent of the time represented investors, and
then discussed his extensive experience and practice. He put
forth that he does not have any personal interest in this
proposed legislation and no clients in Alaska, although 15 years
ago represented two fishermen in Dutch Harbor that fell victim
to a securities scam of over $1 million.
MR. BANKS, in response to Chair LeDoux's previous question
regarding rescission offers, explained that in his experience
during the rare times he has seen them, it involves a seller who
acknowledges they did something wrong. He related that he could
not imagine a situation where if he represented a client and a
rescission offer was made by an issuer who would actually pay
the money back, that he would not advise them to go ahead and
take that offer. He explained that the name of the game once a
person has been scammed and he is representing an investor is to
try to get the money back. While he appreciates the concern for
victims, but in a case where someone sold a junk bond and it was
misrepresented, there will not be a rescission offer because
those are not the types of people that make rescission offers.
Also, with regard to the hypothetical as a practical matter,
that it's not so easy to prevail on the second part of the case
involving the Microsoft stock because there must be proof the
investor was going to purchase on a particular day and sell on a
particular day, which is difficult. In that scenario and any
other scenario he can imagine, he would advise his clients to
take the rescission and be thankful that they got their money
back. He opined that most attorneys representing investors
would probably say the same thing, he said.
2:22:36 PM
MR. BANKS pointed to the Uniform Act and agreed that it has been
enacted in approximately 25 states, but these acts are drafted
by people who are thought to be the best and the brightest in
the industry. The drafters do seek input from all of the
various viewpoints before they do any drafting, they hold
hearings, and have meetings, and he noted that he was contacted
to offer his input with the 2002 Act. That Model Act has been
endorsed by the American Bar Association, New York Stock
Exchange, Investment Council Association of America, North
American Securities Administrative Association, and many
different factions represented. He pointed out that it is
fairly well established and the body of cases are not huge, but
it is nice to be able to look to the case law of other states
whose judges are interpreting the very same statute that is now
before Alaska's courts. Alaska doesn't have many decisions and
it is helpful to have some idea about how these laws are going
to be interpreted when there is a whole body of law from 25
different states rather than just one. He referred to his
written testimony and stated that it is a great idea and he is
in favor of it and hopes it passes and becomes law.
2:24:45 PM
REPRESENTATIVE CLAMAN referred to Chair LeDoux's hypothetical
wherein rather than the investor buying Microsoft stock, buys
the junk bond and after a short period of time the $10,000 he
would have invested in the Microsoft stock is worth $20,000, and
surmised that from the perspective of Mr. Banks, as an attorney
representing investors, would probably advise them to take the
rescission offer at $10,000 due to doubts the additional $10,000
could be collected. Representative Claman asked whether it is
his analysis of this bill that it still allows the common law
remedy but in the practical reality would advise his client to
take the rescission offer and be done.
2:25:54 PM
MR. BANKS answered that he would, although if the dollars get
really big that would be a different question, but he tries to
advise his clients to do the safe course of action most of the
time. In the event they can get the money back in the door it
is considered a success. He pointed out that it will cost the
investor more money to try to go for the other common law
damages. Certainly if the issue was that the investor had to
either take the rescission or file a lawsuit, he would urge his
client to take the rescission offer.
2:26:39 PM
MR. BRECHT interjected that the rescission offer itself is
actually a lengthy process because a written statement and
financial statements were required when he represented issuers
before the Division of Banking and Securities for the State of
Alaska. He related that it is similar to a registration and it
typically comes in the context of a client "sheepishly" telling
him that they didn't realize there was a securities clause in
Alaska and they want to make it right so they can go forward and
do another offering. In other words, he explained, the premise
is that there is an entity that is not a bad guy, just perhaps
inattentive as far as the lay of the laws in Alaska and they
want to move forward by making a reasonable offer to the
investor to give the money back plus eight percent. In the
event the investor accepts then fine, if not the investor
remains as an investor in that particular transaction. A bad
actor likely will not make the rescission offer in the first
place, and will attempt to scam someone else, he said.
2:28:42 PM
MR. BANKS said he agrees with that statement in that it's not
the bad guys making the rescission offers, it is the people who
have made a mistake and want to make it right. The bad guys are
not willing to spend the amount of money it take to do a
rescission offer which can be considerable, he offered.
CHAIR LEDOUX reiterated that she wants to be certain that the
very fact that somebody has made a rescission offer, and the
investor decides to continue with common law remedies, that the
very existence of a rescission offer does not preclude those
common law remedies. She opined that the testimony has been
that it doesn't, but she was not certain.
2:30:02 PM
MR. BRECHT responded that it depends upon the terms of the
rescission offer because it is a contract wherein the investor
waives their rights. From his standpoint in representing an
issuer, he would try to get them to waive all rights relating to
this particular transaction in return for the investor's money
back plus eight percent per annum.
REPRESENTATIVE CLAMAN pointed out that the question is not being
answered and he restated the question, if there is a rescission
offer on the table and the investor choses to reject that offer,
they have all of their common law remedies.
MR. BRECHT agreed.
REPRESENTATIVE CLAMAN surmised that the only reason the investor
would lose the common law remedies is if they accepted the
offer. Therefore, he said, if the investor chooses to decline
the offer, the investor has everything available through common
law and Alaska Statutes.
MR. BRECHT agreed, they are not obligated to accept the
rescission.
2:31:30 PM
CHAIR LEDOUX opened public testimony.
2:31:49 PM
JULIETTE SHEPARD, Technology Lead Development Coordinator,
Fairbanks Economic Development Corporation (FEDC), advised that
she works with entrepreneurs and startups, and the Fairbanks
Economic Development Corporation (FEDC) is the trustee for
(indisc.) loan which is a crowdfunded loan program where lenders
make microfinance loans directly to borrowers in the United
States by the internet. She offered that FEDC supports HB 194,
to modernize Alaska's securities laws for small intra-state
crowdfunding investment opportunities that would permit Alaska
residents to invest in Alaska businesses. She noted that the
FEDC requests that the legislature consider increasing the
maximum per person offering and making it closer in alignment
with what was proposed in SB 126.
2:33:09 PM
CHAIR LEDOUX asked Ms. Shepard to point to the page and section
she was discussing.
MS. SHEPARD advised that she does not have HB 194 because she is
calling in remotely and is away from her office. She said the
section she cited is from the letter of support submitted from
the North American Securities Administration, outlined in the
second half of paragraph five, which identifies the per person
offering at $5,000.
MR. BRECHT advised that it is Sec. 45.56.220, Small intrastate
securities offerings, page 26.
2:35:10 PM
CHAIR LEDOUX asked Ms. Shepard to explain where in the section
[pages 26-29] she is discussing.
MS. SHEPARD advised that she was referencing the dollar amount
per person be as flexible as possible with a maximum amount
closer to the $7,500 proposed in SB 126, thereby, allowing
opportunities for individuals to contribute more fully.
2:35:39 PM
MS. NAYLOR interjected that Ms. Shepard is referencing page 27,
lines 12-14, and the $5,000 limit.
REPRESENTATIVE CLAMAN asked whether it was the testifier's
suggestion that amount on line 12, should be increased from
$5,000 to $7,500.
MS. SHEPARD offered that it be considered to be increased as
previously proposed.
REPRESENTATIVE CLAMAN asked whether the $5,000 amount is coming
from the model act, or from somewhere else.
MS. NAYLOR responded that the model used was from the State of
Alabama as there is no model act language from the Uniform
Securities Act relating to crowdfunding because crowdfunding is
roughly two years old so they modeled their proposal after
another state and its simple approach.
2:37:13 PM
CHAIR LEDOUX asked whether the Division of Banking and
Securities has thoughts about amending the bill to read $7,500
rather than $5,000.
MS. NAYLOR responded that the Division of Banking and Securities
leaves that decision to the discretion of the committee as it
does not take a position on the amount.
2:38:09 PM
CHAIR LEDOUX offered that this is something to think about and
the bill will be held over. After ascertaining that no one
wished to testify, closed public testimony.
[HB 194 was held over.]