Legislature(1997 - 1998)
04/24/1998 03:28 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 486 - ALASKA SECURITIES ACT Number 0154 CHAIRMAN ROKEBERG announced the committee's next order of business was HB 486, "An Act relating to the Alaska Securities Act; and providing for an effective date." Number 0170 FRANKLIN TERRY ELDER, Senior Securities Examiner; Division of Banking, Securities and Corporations; Department of Commerce and Economic Development (DCED), came forward to testify in support of HB 486 which he called an Act to amend the Alaska securities Act. He thanked the committee for its willingness to introduce this important piece of legislation which the department believes helps preserve significant state revenues while improving investor protection and providing new, easier access to capital markets for Alaska businesses. He indicated the questions might be asked, "Why are we amending the securities Act and why is the bill so long?" He said they were amending the securities Act for a number of reasons. Congress passed the National Securities Markets Improvement Act (NSMIA) in 1996, which created a new class of securities called "federal covered securities" and a new type of investment advisers called "federal covered advisers." He said NSMIA preempts states from requiring registration and collecting registration fees for these securities and advisers. However, in order to be revenue neutral, roughly, it allows states to amend their statutes and regulations to require notice filings and notice fees, which is what HB 486 does. Alaska currently receives annual revenues from these sources in excess of $4 million and these revenues have been growing at an approximately 14 percent rate over the last few years. At that rate, the revenues from these sources would roughly double in five years. Mr. Elder stated, "To preserve our revenues, we must amend our Act to include these new types of securities and investment advisers, and to provide for notice filings and notice fees. We must also amend our Act to preserve the authority NSMIA gives to the states to continue to provide assistance to Alaska investors who complain about abusive sales practices by their investment advisers. If we do not amend our Act, the general fund loses this revenue and we lose the authority to enforce the anti-fraud provisions of the securities Act with respect to federal covered advisers and their representatives." Number 0265 CHAIRMAN ROKEBERG asked, "Who are those (indisc.) people? Are they investment banking account executives ... 'cause they are federally licensed but you can also regulate them here in the state ...? MR. ELDER replied that they are large investment advising firms who, with NSMIA, only register with the Securities and Exchange Commission (SEC). In the past these large firms registered with both the SEC and the states. He said, "However, in NSMIA [it] said that we can continue to require that they pay notice fees here and we can continue to enforce the anti-fraud provisions of our Act. So, the SEC sees the states as the cop on the beat 'cause we're closer to the investors. ... If we don't do this, we don't have the authority to help investors. We basically would have to tell 'em to call the SEC if they have a problem." CHAIRMAN ROKEBERG asked if there was a threshold size for large. MR. ELDER replied $25 million under management, roughly. He noted it was more complicated than that but that was essentially the threshold. He said that anything with $25 million or more under assets is a "federal covered advisory (indisc.)." CHAIRMAN ROKEBERG said, "A large local investment adviser like McKinley Capital Management [McKinley Capital Management, Incorporated] in Anchorage ..." MR. ELDER said, "That's federal ..." CHAIRMAN ROKEBERG continued, "... SEC, but then what relations or what ..." Number 0322 MR. ELDER stated that McKinley Capital Management, Incorporated, is large enough; it will be a federal covered adviser, and therefore it is registered with the SEC. CHAIRMAN ROKEBERG asked what Mr. Elder's department had to do with that company, for example. MR. ELDER answered, "Nothing, except for enforcing anti-fraud provisions. So, if they commit fraud, ... we could go after 'em. We don't anticipate that of course, but ... that's what we could do." CHAIRMAN ROKEBERG asked about registered securities dealers and so forth. MR. ELDER replied that broker-dealers are not affected in that way. They still register broker-dealers and still have similar authority over broker-dealer to what they had before. CHAIRMAN ROKEBERG asked, "Without regard to capital size or anything?" MR. ELDER said that was correct. CHAIRMAN ROKEBERG indicated that could go from a one-man shop to Merrill Lynch and Company, Incorporated. MR. ELDER answered that was correct. He indicated NSMIA does affect some areas regarding broker-dealers, noting the department could no longer, for example, require different capital requirements, or books and records requirements for broker dealers than required by the SEC. Mr. Elder said there was no change in terms of the general regulation of broker-dealers. Number 0373 MR. ELDER continued, "The next question is, 'Why is the bill so long?' First, NSMIA is the most significant change to federal securities laws in the last 50 years. It affects not only securities regulations by creating federal covered securities but - but makes changes to the regulation of broker-dealers and especially to the regulation of investment advisers. This means that a lot of sections of our statute have to be changed to conform to the new regulatory regime. Our current statutes do not include notice filings and fees. They don't include federal covered securities, federal covered advisers, investment adviser representatives, state investment advisers - the smaller ones that are no longer subject to SEC regulations at all but only to those of the states, or prohibitions against specific unethical and fraudulent business practices, especially for investment advisers, which NSMIA provided was the proper domain for the states to enforce. So, we have to make changes to accommodate all of those ... in our Act. All of these require numerous changes and additions to the securities Act resulting in a long bill. Most of the language of these changes ... in this bill was drafted by the North American Securities Administrators Association (NASAA) ... I call it the NASAA that doesn't go to the moon. ... It's an organization of securities administrators of which we - we belong, in all the 50 states including Puerto Rico and D.C. [Washington, D.C.], also provinces of Canada and - and Mexico. We also worked with industry and we have received and given you in your packets copies of letters endorsing this legislation from the Investment Company Institute and the Investment Council Association of America (ph), both associations that represent the major players that are affected by this legislation, mutual funds and investment counselors." CHAIRMAN ROKEBERG asked if he had had a chance to circulate this among the people in the state who would be impacted. Number 0466 MR. ELDER answered in the affirmative. He stated, "We provided drafts of our proposed changes to persons who requested them, mostly attorneys who are practicing in the field. We also participated in a continuing legal education seminar in October of '97 in Anchorage with the Alaska Bar Association, and we provided the bar association copies of a draft of the changes and solicited ... comments .... In addition to the changes required by NSMIA, we are proposing new or updated language to other sections of the securities Act, sometimes to modernize language, and sometimes to improve access to capital markets for Alaska businesses." He said he would give a few examples, stating, "There's a new exemption from registration that's added for businesses that are seeking capital but limiting their search to a select category of wealthy investors and institutions called accredited investors. It's called the accredited investor exemption. This will allow Alaska businesses to participate in new methods of raising capital such as ACE-Net, that's the Angel Capital Electronic Network, which was a creation of the Small Business Administration. There's a new exemption added for businesses making their initial issuance of shares to the people forming the business and not to the general public. Some small businesses form and never intend to sell shares to the public. This exemption will remove the requirement for those people to file a request for exemption with the state. There's a new exemption added for the sellers of a business who transfer stock to the buyers of the business when ... the transfer is solely incidental to the sale of that business. That'll remove the potential liability that exists today when a small business owner sells his business to someone and neglects, when he transfers that stock because he had incorporated, ... to either file a registration or exemption with - with the state. Next, there's a new reciprocal limited registration created for Canadian broker- dealers to provide service to their existing clients who happen to be in Alaska for whatever reason, without having to be subject to the full examination and registration requirements of the Act. They are subject to the anti-fraud provisions of the Act. They cannot compete for new customers, but only service their existing Canadian customers who are in Alaska." Number 0575 MR. ELDER continued, "It is reciprocal in that for a Canadian broker-dealer to be able to do this, that Canadian province must allow the same for a US [United States] broker-dealer. These are probably the largest changes to the Act, so, in the interests of the committee's time, I won't go ... into the other changes, but will refer you to the comments that we have provided on sections of the bill, both for all the sections and specifically for the non- NSMIA sections ...." He noted he would be happy to answer any questions after he finished his presentation, but commented there were some corrects to the current draft of HB 486. He stated the division worked with legislative counsel in drafting the bill, and appreciated counsel's hard and careful work, but he said there had not been an opportunity for the division to proofread the bill before it was introduced. He referred to a letter from himself to the the chairman, dated April 16, 1998, containing the needed 13 changes in amendment form. He stated, "The first 10 changes ... that are numbered are replacements for sections as they exist in the current draft of the bill, so it'd be simply a matter of replacing the current sections with ... those that are in - in the letter .... Change number 11 in the letter is a new paragraph which is added to the definition of investment adviser. This is a paragraph that I had discussed verbally with legislative counsel, and we had agreed ... to insert it but somehow it got left out. This is the only correction that would add a new paragraph to the bill, and it would be on page 63. If adding a new paragraph to the bill would cause a logistical problem in - in moving the bill, then we can do without it, but ... if that wouldn't cause a problem then - then this would be useful. The last two changes in the letter are changes to the dates. ... When I was speaking with legislative counsel they told me they were going to put in a November 1, 1998, effective date, and I noticed that it's November 1, 1999, which unfortunately would cause us to lose our authority to collect notice fees ... and require notices." Number 0750 CHAIRMAN ROKEBERG asked if there was anything in there that would preclude the department from drafting regulations prior to their effective dates, noting the committee had gone through this with another bill that year. He said the committee was concerned because the effective date in certain sections was "out some time," that without those sections being adopted, they didn't have authority to do the "regs" until that effective date. MR. ELDER stated, "My reading of this allows us to go out and - and draft the regulations, but they wouldn't take effect until November 1, 1999." CHAIRMAN ROKEBERG confirmed the authority was in specific language in the bill. MR. ELDER agreed, stating, "In the last page ... of the bill it has -- Section 78, it says notwithstanding Section 82, the Department of Commerce may immediately proceed to adopt regulations necessary to implement the changes in the regulations take effect but not before November 1, 1999. And so we - we could do that ... I'm simply saying that that would be too late because the ..." CHAIRMAN ROKEBERG noted the committee had gone into that before, particularly on similar large things where there were prospective future dates. Number 0820 MR. ELDER indicated he suspected, based on his communication with legislative counsel who had said, November 1, 1998, that this had been a mistake. REPRESENTATIVE HUDSON commented, because of his extreme confidence in Willis Kirkpatrick [Director, Division of Banking, Securities and Corporations] and Mr. Elder, he would like to consider the suggested amendments 1 through 10 in Mr. Elder's letter as Amendment 1. CHAIRMAN ROKEBERG commented that was not a problem. Amendment 1 (taken from Mr. Elder's April 16, 1998, letter) read: 1. (Section 1, page 2, line 14) Replace current AS 14.43.148(h)(1)(A)(xiii) with the following: (xiii) registration as a broker-dealer, an agent, a state [OR] investment adviser, or an investment adviser representative under AS 45.55.030; 2. (Section 2, page 3, line 24) Replace current AS 25.27.244(s)(2)(A)(xii) with the following: (xii) registration as a broker-dealer, an agent, a state [OR] investment adviser, or an investment adviser representative under AS 45.55.030; 3. (Section 3, page 5, line 5) Replace current AS 25.27.244(s)(2)(A)(xii) with the following: (xii) registration as a broker-dealer, an agent, a state [OR] investment adviser, or an investment adviser representative under AS 45.55.030; 4. (Section 4, page 5, line 30) Replace current AS 37.23.050(a)(2) with the following: (2) a state [AN] investment adviser registered under AS 45.55.030 [AND UNDER 15 U.S.C. 80b-3 (INVESTMENT ADVISERS ACT OF 1940)] or a federal covered adviser that has made a notice filing under AS 45.55.040(h); 5. (Section 29, page 32, line 12) Replace current AS 45.55.060(d)(6) with the following: (6) the administrator may by regulation provide for an examination, which may be written or oral or both, to be taken by any class of or all applicants, [AS WELL AS PERSONS WHO REPRESENT OR WILL REPRESENT AN INVESTMENT ADVISER IN DOING ANY OF THE ACTS WHICH MAKE THE INVESTMENT ADVISER AN INVESTMENT ADVISER] including applicants for registration as investment adviser representatives of state investment advisers or federal covered advisers, if [PROVIDED THAT] examinations required by this paragraph are not required of a registrant under this chapter who was doing business in this state and was a resident of this state on May 9, 1959. 6. (Section 46, page 39, line 20) Replace current AS 45.55.900(a)(5) with the following: (5) a security issued in connection with an employee's stock purchase, savings, pension, profit- sharing, or similar employee's benefit plan, or a security issued by or an interest or participation in a church plan, company, or account that is excluded from the definition of an investment company under 15 U.S.C. 80a-3(c)(14) (Investment Company Act of 1940); 7. (Section 47, page 44, line 7) Replace current AS 45.55.900(b)(5)(C)(i) with the following: (i) the persons are promoters as the administrator may define "promoter" by regulation or order; and 8. (Section 47, page 44, line 18) Replace current AS 45.55.900(b)(5)(D)(ii) with the following: (ii) the seller provides full access to the buyer of the books and records of the enterprise or business; and 9. (Section 47, page 52, line 2) Replace current AS 45.55.900(b)(18)(H) with the following: (H) dissemination of the general announcement of the proposed offering to persons who are not accredited investors will not disqualify the issuer from claiming this exemption; 10. (Section 68, page 58, line 25) Replace current AS 45.55.980(f) with the following: (f) AS 45.55.020, 45.55.023, 45.55.030(c), 45.55.030(e), 45.55.040(h), and 45.55.170, so far as state investment advisers, federal covered advisers, and investment adviser representatives are concerned, apply when any act instrumental in effecting prohibited conduct is done in this state, regardless of whether [OR NOT] either party is then present in this state. Number 0841 REPRESENTATIVE HUDSON made a motion to adopt Amendment 1. There being no objections, Amendment 1 was adopted. Number 0873 REPRESENTATIVE HUDSON made a motion to move the proposed amendment 11 in Mr. Elder's letter as Amendment 2, noting it was a complete sectional addition to the bill. Amendment 2 (taken from Mr. Elder's April 16, 1998, letter) read: 11. (Section 75, page 63, line 17) Add to AS 45.55.990(23) a new section (C) as follows: (C) except for (37)(A)(ii) of this section, "investment adviser representative" does not include a person that would not be defined as an investment adviser representative under 17 C.F.R. 275.203A-3 adopted under 15 U.S.C. 80b-3A (Investment Advisors Act of 1940). CHAIRMAN ROKEBERG objected, indicating it was for discussion. He asked Mr. Elder to explain what the new Section 75 would be doing. Number 0896 MR. ELDER responded, "In NSMIA, the SEC is given the authority to define 'investment adviser representative' and so we have crafted ... the definition in our ... Act according to the definition that the SEC has already come up with." He said this paragraph would allow the department to automatically track with the SEC, noting investment adviser representative had never been defined before and there could be changes, especially in the first few years. If the SEC deleted someone from the definition of investment adviser, then the person would be automatically deleted from Alaska's definition as well. He noted the state could not differ from the SEC's definition of investment adviser representative. Number 0958 CHAIRMAN ROKEBERG asked for a definition of this representative. MR. ELDER said essentially an investment adviser representative is an agent of an investment adviser, whether it's a state investment adviser or federal covered investment adviser. When you walk into the office of a broker-dealer, the person you talk to about buying and selling stocks is an agent of that broker-dealer; he said the person actually giving the investment advice, representing that investment adviser is called an investment adviser representative. Number 0979 CHAIRMAN ROKEBERG asked where the line of demarcation was. He asked if the person had to be an employee, an adviser with a register corporation and additionally licensed themselves. MR. ELDER replied the person would have to be a supervised person of an investment adviser by definition, so he or she would either be the representative of state investment adviser registered with the state or a federal covered adviser registered with the SEC and noticed with the state. CHAIRMAN ROKEBERG confirmed that this person was advising in the actual acquisition, sales and purchasing of securities. Number 1019 MR. ELDER agreed, noting this person is giving the advice. CHAIRMAN ROKEBERG asked if the distinction was made that this person is not what is known as a financial planner or financial adviser. MR. ELDER said if a financial planner does not give investment advice and does not receive income for that advice separate from financial planning then that is correct. CHAIRMAN ROKEBERG commented many times a no-fee financial planner receives his or her compensation from fees provided by securities companies when the planner recommends securities, asking if these planners would be covered under this. MR. ELDER indicated that person would be required to be registered if he or she gives investment advice with respect to allocation of assets and specific securities. He confirmed someone who recommended a mutual fund purchase, for example, would be giving investment advice and would have to a registered investment adviser representative. Number 1067 REPRESENTATIVE JOE RYAN asked if the father of a friend, who gives very good investment advice, would have to become licensed under this, or only if he asked for a fee. MR. ELDER indicated the requirement would apply if the person held himself out to the public for a fee. Number 1077 CHAIRMAN ROKEBERG asked if the state of Alaska or the Division of Banking, Securities and Corporations had any particular regulatory authority over the area called financial planning unless these planners fall under the investment adviser representative definition. MR. ELDER answered in the negative. CHAIRMAN ROKEBERG said he wondered because it is a growing industry with very little regulation, definition, educational requirements, et cetera. He said there are national organizations that are somewhat self-policing, but there seems to be little state or federal regulation of these activities. MR. ELDER said that was correct, noting the department adds some language in here to make it very clear to people in that business that if they are giving investment advice, then they are investment adviser representatives. CHAIRMAN ROKEBERG asked if fee-based financial planners not compensated by mutual fund companies but receiving fees from the clients they were advising would be covered under the definition. MR. ELDER said it depends on what kind of advice the planners are giving. If these planners are giving financial planning advice, then they would not be covered by the investment adviser representative. If these planners were recommending something like additional equity exposure, specifying specific mutual funds that would fit the client's objectives, then they would be giving investment advice. Number 1180 CHAIRMAN ROKEBERG withdrew his objection to Amendment 2. There being no further objections, Amendment 2 was adopted. Number 1196 REPRESENTATIVE HUDSON made a motion to adopt amendments 12 and 13 in the April 16, 1998, letter as Amendment 3, indicating both suggested amendments were changing the date from November 1, 1999, to November 1, 1998. There being no objections, Amendment 3 was adopted. Amendment 3 (taken from Mr. Elder's April 16, 1998, letter) read: 12. (Section 78, page 67, line 6) Change the date from November 1, 1999 to November 1, 1998. 13. (Section 82, page 67, line 13) Change the date from November 1, 1999 to November 1, 1998. Number 1235 CHAIRMAN ROKEBERG noted Representative Ryan had provided an amendment to the committee, asking if Mr. Elder had seen this amendment. Representative Ryan's amendment, labeled 0-LS1426\A.1, Bannister, dated 4/24/98, later referred to as Amendment 4, reads: Page 44, lines 4 - 12: Delete all material and insert: "(C) to 10 or fewer persons who are to receive the initial issue of shares of a nonpublicly traded corporation, limited liability company, limited partnership, or limited liability partnership if a legend is placed on the certificate or other document evidencing ownership of the security stating that the security is not registered under this chapter and cannot be resold without registration or exemption from it;" Page 44, lines 4 through 12, in HB 486 read (as amended by Amendment 1): (C) to 10 or fewer persons in this state who are to receive the initial issue of shares of a nonpublicly traded corporation or limited liability company organized in this state if (i) the persons are promoters, as the administrator may define "promoter" by regulation or order; and (ii) a legend is placed on the certificate or other document evidencing ownership of the security, stating that the security is not registered under this chapter and cannot be resold without registration under this chapter or exemption from it; MR. ELDER said he saw the amendment shortly before this meeting. CHAIRMAN ROKEBERG stated it was not his intention to move HB 486 that day, he indicated it was his intention to move it at the next meeting, April 27, 1998. He asked if Mr. Elder would like more time to look over the suggested amendment or if he cared to comment at this time. Number 1278 MR. ELDER chose to comment, stating that the change that this would make to the new exemption that they had proposed, "(b)(5)(C)," would not affect the people they had in mind for "(b)(5)(C)." He indicated the amendment would broaden the exemption but not affect the people it was originally intended for. He said, "What we had in mind specifically for the '(b)(5)(C)' exemption was people who are incorporating their business and ... they're issuing the initial shares to themselves and not to the general public ...." He said this still deals specifically with the initial issuance, but said he sees two primary differences. He noted they have corporations and limited liability companies, and he said this adds limited partnerships and limited liability partnerships. He doesn't think that is a problem. The other thing it does is remove a reference to a requirement that the entity be organized in the state of Alaska; he also doesn't think that is a problem. The third thing he said it does is removes the requirement that these people, the ten or fewer persons, be promoters as defined by regulation. Promoters are currently defined in regulation essentially as people who directly or indirectly take an active role in forming the company. He noted that since this exemption is still limited to the initial issue of shares, presumably all of those people probably would be involved in the formation of the entity, and so that probably is also not a problem. On that basis, he said, while it is not their proposal and therefore they are not recommending it, they won't oppose it either. Number 1400 REPRESENTATIVE RYAN noted it was his amendment and explained why it was offered. He said, "Last year I submitted a bill, since the IRS [Internal Revenue Service] restrictions on limited liability companies (indisc.) criteria you had to meet depending on whether you're gonna be treated for taxation as a corporation or you could have passed from taxation or repealed by the IRS, and so we updated the limited liability company Act to reflect that IRS update, which makes it very easy to form, and so far Alaska's the only state that's done that, so we have got a major stake in business with the exception of this sticky point in registering these (indisc.). Companies are getting the exemption. Now, the agency or the department's been issuing a letter saying that, yeah, these aren't securities as such. And this has been the fly in the ointment for people who want to use these in the formations of trust and number of other things throughout the world, not just in Alaska. Alaska has this new updated limited liability company law and (indisc.) have these limited (indisc.--rustling) various purposes they want to outside of Alaska and there's no registration in other states, but Alaska had this thing, so I'm putting this amendment here to clean that up so that this will be open and we can take advantage of that Act and we can do the business we want to do. There was a very large company going to be (indisc.--coughing) million dollars (indisc.) assets and because of this sticky provision, they don't have to register in Florida and they don't want to register here, so the deal went sour. We stand to make a lot of money, and part of what this whole business in (indisc.) with trust and limited liability companies and so forth -- like to have Alaska as a - noticed as an estate planning venue, and this amendment would facilitate that, that's why it was offered." Number 1530 MR. ELDER added that simply because a security is exempt from registration does not mean it is exempt from the anti-fraud provision, so, if in fact, there was a problem with an abuse of some type the department would have authority to go after the issuer. Number 1552 REPRESENTATIVE RYAN requested to offer his amendment as Amendment 4. He mentioned an accompanying letter from Richard W. Hompesch, II, of Hompesch and Associates, Attorneys at Law. CHAIRMAN ROKEBERG asked if deleting the term "promoter" caused any problems, and if there were other purposes for having that term in regulation. Number 1612 MR. ELDER replied the reason they had added promoter was simply that what they had in mind was to provide an exemption for people who are forming their own companies, issuing stock to themselves, and not to the general public, with the reasoning of, "Why make them go through filing with the state?" He said they see this a lot, giving the example of a fisherperson in Petersburg who decides to incorporate, with the two spouses owning the business, incorporating, putting the assets of the fishing business into the corporation and issuing stock to themselves. In this example, these people currently have to send the state a letter and the department has to grant an exemption or write a letter stating the department won't take action against them. He said the department simply thought it would provide an automatic mechanism to cover people in those situations. Mr. Elder said that because those are people who are forming the company, they fit the definition of promoter which is why it was in there. He said it was in particular to distinguish these people from passive investors, commenting the committee would notice there is no disclosure requirement. Number 1721 REPRESENTATIVE RYAN commented that when a corporation is formed, a $40 fee and letter to the director of the Division of Banking, Securities and Corporations stating that these stocks aren't going to be publicly traded and are exempt from the SEC requirements. Number 1746 CHAIRMAN ROKEBERG said he understood, but noted he had not seen this letter and the department had not seen the letter. He said he respects Mr. Hompesch, but Mr. Hompesch says that the department "is gutting the benefit of new law by narrowly defining promoter," noting the chairman was not sure what that meant. Chairman Rokeberg said, "I don't think we're gonna have any trouble with this, but I certainly would have them have a chance to look at this. Would you have any objections to that ...." REPRESENTATIVE RYAN asked if he had seen the letter from Mr. Hompesch. MR. ELDER said he had not seen the letter. REPRESENTATIVE RYAN apologized, indicating he thought copies had been conveyed. Copies of the letter were distributed to the committee. Mr. Hompesch's April 23, 1998, letter via facsimile to Representative Ryan read: You asked if HB 486 in its current form resolves the securities bottleneck upon formation of Alaska limited liability companies and limited partnerships. HB 486 does not eliminate the problem. Section 47 of HB 486 should be amended (AS 45.55.900(b)(5)(C); lines 4 through 12 on page 44). Proposed language is attached. HB 486 adds new AS 45.55.900(b)(5)(C), but this provision has three defects. There are three problems. First, the exemption applies for sales made to 10 or fewer person in this state. There is no reason why an exemption should apply when sales are made in Alaska, but should not apply when sales are made outside Alaska. Any sales made outside Alaska are subject to regulation by federal and other state law. Federal and other state law is sufficient to regulate sales outside of Alaska without additional regulation from Alaska. Second, HB 486's version of AS 45.55.900(b)(5)(C)(i) does not apply to limited partnerships. Third, HB 486's version of AS 45.55.900(b)(5)(C)(i) would allow the Division to "gut" the benefit of the new law by narrowly defining "promotor" in such a way that few transactions would qualify for this exemption. Alaska would not benefit if HB 486 was passed and then the Division "took-away" the benefits by administrative order. I understand that Bob Manley and Dave Shaftel spoke with Terry Elder this morning and that Mr. Elder agreed to an amendment that would allow an exemption for family members. A copy of this amendment is attached along with a cover sheet from Dave Shaftel's office. Unfortunately the amendment does not include a good definition of "family members." It is unclear whether step-parents would be considered to be "family members." If you have any questions, please call me. Number 1800 CHAIRMAN ROKEBERG indicated his intention was allow everyone the opportunity for review, taking HB 486 up first thing at the next committee meeting. He noted that if the department wanted to look at that, and if there were any other amendments, the committee could take them up and proceed quickly with them. REPRESENTATIVE RYAN asked if the chairman had any objection to his amendment. CHAIRMAN ROKEBERG indicated he brought it up to see if the department had any objections. He asked for an explanation of limited liability partnership, asking Representative Ryan if they created that with the bill last year. MR. ELDER said it was a relatively new entity. REPRESENTATIVE RYAN commented he thought it was created a couple of years ago in a bill by Representative Gene Therriault. MR. ELDER said it is a fairly new entity and the department is simply adding it because it and limited liability companies are entities that didn't exist when the securities Act was passed. CHAIRMAN ROKEBERG noted it was not in the department's version but it was in Representative Ryan's. MR. ELDER said that did not, by itself, present a problem. CHAIRMAN ROKEBERG asked about limited partnerships, questioning if there were restrictions relating to the ten or under, and how those limited partnerships were handled because those entities are brought into this amendment. MR. ELDER answered in the negative, stating that limited partnerships would not create a problem. He said the expansion from corporations and limited liability companies to include limited partnerships and limited liability partnerships would not present a problem. CHAIRMAN ROKEBERG asked if that was because of the numbers of people. MR. ELDER said because of the numbers of people and because this is limited to the initial issuance. CHAIRMAN ROKEBERG asked what the threshold was for limited partnerships. He asked if registration was required for over ten people or if it was a dollar amount. MR. ELDER replied that was not his area and he did not know. REPRESENTATIVE RYAN stated, "Basically limiting the liability of the partners -- in previous in a partnership, everybody is (indisc.) -- you owe whatever your partner runs up. In a limited partnership you have ..." CHAIRMAN ROKEBERG interjected he knew that, but was wondering what the restrictions are in the balance of the laws related to limited partnership because they are not spoken to in this section. Number 1963 VINCE USERA, Assistant Attorney General, Commercial Section, Civil Division, Department of Law, offered his assistance. He said the limitation is no more than 10 investors and $500,000 for a limited partnership that does not have to go through registration. CHAIRMAN ROKEBERG noted, then, there was an another requirement relating to the dollar amount. REPRESENTATIVE RYAN commented it was (indisc.) capitalization. CHAIRMAN ROKEBERG asked Representative Ryan if adding that would have any bearing on this. REPRESENTATIVE RYAN said the flexibility of limited liability companies and partnerships are the reason for passing this law. CHAIRMAN ROKEBERG confirmed Mr. Usera was familiar with the amendment and had no comments on it. MR. ELDER indicated he did not think the department's position on the amendment would change between that meeting and the Monday, April 27 meeting. He said that while they had something specific in mind when they added the "(b)(5)(C)" exemption, he does not think they would have any objection to this although they are not recommending it. Mr. Elder said their major concern is to get the bill through as expeditiously as possible. Number 2125 CHAIRMAN ROKEBERG indicated the bill would be moved very rapidly at the next meeting, but he was wondering about Mr. Hompesch's statement that the department narrowly defines promoter, noting the bill allows the department to define promoter by regulation in the future and he wonders how narrow that is. Number 2137 MR. ELDER noted he had not spoken with Mr. Hompesch about that and he has never heard that the department defined promoter too narrowly. He said it is defined in regulation and the department will be redoing its regulations as a result of this legislation, noting there would be ample opportunity for recommendations to the department regarding the definition of promoter or anything else. CHAIRMAN ROKEBERG asked if promoter was used elsewhere in the bill so that its removal here would not damage the department's ability to define it. MR. ELDER said it is used elsewhere and this would not hurt that ability of the department. Number 2171 REPRESENTATIVE RYAN made a motion to move the amendment he had submitted, labeled 0-LS1426\A.1, Bannister, dated 4/24/98, as Amendment 4. There being no objections, Amendment 4 was so adopted. REPRESENTATIVE RYAN asked Mr. Elder for his opinion of Mr. Shaftel's proposed amendment for family transactions included with Mr. Shaftel's April 23, 1998, facsimile. Representative Ryan noted the language "fourth degree of affinity or consanguinity (including adoption)." MR. ELDER indicated he was familiar with the amendment and the department would not have any problem at all with that amendment. CHAIRMAN ROKEBERG interjected that the committee did not have copies of Mr. Shaftel's communication and amendment. Copies were provided to the committee. Number 2280 CHAIRMAN ROKEBERG called a brief at ease at 4:05 p.m. The committee came back to order at 4:08 p.m. [THE TAPE WAS CHANGED WHILE THE COMMITTEE WAS AT EASE] TAPE 98-51, SIDE A Number 0001 CHAIRMAN ROKEBERG stated the committee has before it an amendment recommended by Mr. Shaftel regarding transactions involving family members. He asked Mr. Elder to speak to the amendment. Number 0038 MR. ELDER explained that he spoke to some members, including Mr. Shaftel of the Anchorage Bar Association, who have worked in the area of state planning and probate. He said, "They're also fairly active in making filings with our division. They indicated a desire to add an exemption, and this is the exemption they sent me, which would essentially exempt transactions involving only family members. And to a large extent, these are - the way they are now these are limited partnerships often that are created and funded by the parents that go into children's and grandchildren's trust accounts and things like that, that currently they may not fit an exemption. And the way it is now, the attorneys write us a letter and ask us not to take action against them for not registering the transactions and we routinely provide that letter to them. And so on that basis, we wouldn't have a problem with this. This simply says if you're doing something in the family then we won't get involved, you're not doing it to the general public." Number 0175 CHAIRMAN ROKEBERG said that it looks like there are 19 exemptions. Number 0198 MR. ELDER agreed and said the proposed amendment would go under [AS] 45.55.900 which lists the exemptions. In the bill it would be on page 52 and it would probably be item 20. Amendment 5 reads: Add a new subsection to AS 45.55.900(b), as follows: (Number) a transaction involving only family members who are related within the fourth degree of affinity or consanguinity (including adoption). Number 0231 CHAIRMAN ROKEBERG said, "The committee will mark the amendment up to make this subsection 20 and then mark it up as Amendment Number 5. The Chair would entertain a motion on Amendment 5." REPRESENTATIVE JERRY SANDERS moved that Amendment 5 be adopted. There being no objection, Amendment 5 was adopted. CHAIRMAN ROKEBERG referred to the fiscal note and asked Mr. Elder to explain the "notice and fee" comments. He asked how the money is collected and how would it be jeopardized by the failure to adopt the bill. Number 0305 MR. ELDER stated that before NSMIA passed in 1996, securities had to be either registered or exempted and with that, they had to pay a registration fee or an exemption fee. When NSMIA passed and created the federal covered security, it defined a certain type of security that it calls "covered security" and it says that states may not register those securities. If that's all it did, then they would no longer have to register in the state to sell those securities in the state and wouldn't pay any fees. But Congress wanted NSMIA to be revenue neutral to the states so it said, "Even though the states can't register them, we will allow the states to require a notice filing so that the states will at least know that those securities are being offered here and pay a notice fee," which is roughly equivalent to what they were paying before. He said "What the -- the largest group of securities by far and away - by far and away the largest group of securities affected here in Alaska are mutual funds. The mutual funds that are sold here in the past would be registered here and would file a registration and pay a registration fee." He stated that currently, they give us a notice and pay a notice fee. That can be done temporarily as that ability runs out in 1999, and that is why the act has to be amended. MR. ELDER pointed out that the fiscal note refers to the revenues lost and said 99.9 percent of the data the department is providing to the committee is from mutual fund filings. They generate in excess of $4 million per year and have been growing at 14 percent. Number 0460 CHAIRMAN ROKEBERG said, "In the event that a mutual fund share is sold in the state, there is a ultimate payback to the state treasury or is it because they register and do business in this state." Number 0471 MR. ELDER responded, "Because they register to sell their fund here, they have to -- they pay a fee and that fee, frankly, goes toward offsetting the cost to the state for investor protection and other things that make markets work well." CHAIRMAN ROKEBERG asked if it is based on the fact that they want to have the right to sell the fund in the state or is based on their volume. He also asked if there is annual fee. Number 0499 MR. ELDER stated that it is the right to sell in this state. In the past, the fee has been based on volume. He said it doesn't have to be based on volume as some states have a flat fee. CHAIRMAN ROKEBERG asked if it is annual volume fee. Number 0519 MR. ELDER stated that is set by regulation. In the past, it has been a volume fee. In other words, the fee was $100 plus 1/10 of 1 percent of what you want to sell in Alaska up to a maximum of $3,000. He indicated if a person wanted to register $100,000 worth of his or her fund, it would cost $200. He reiterated that a lot of states have gone to a flat fee, especially with the notices. Mr. Elder noted the Investment Company Institute that represents mutual funds supports this legislation. CHAIRMAN ROKEBERG indicated the legislation would be held.
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