Legislature(1999 - 2000)
02/17/1999 03:24 PM L&C
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 83 - ALASKA SECURITIES ACT Number 0032 CHAIRMAN ROKEBERG noted the first order of business is HB 83, "An Act relating to the licensing of, acts and practices of, notice filings required of, duties of, registration of, capitalization of, financial requirements for, bonding of, coordinated securities examinations of, recordkeeping by, and documents filed by certain securities occupations; relating to public entity investment pools; relating to investment advisory contracts; relating to the examination of records of certain securities occupations; relating to federal covered securities; relating to the registration of securities; relating to the general exemptions for securities and transactions; relating to offers of securities on the Internet; relating to the confidentiality of investigative files under the Alaska Securities Act; relating to the payment by certain securities occupations of expenses and fees of investigations and examinations; relating to petitions to superior court by the administrator to reduce civil penalties to judgment; exempting certain violations of the Alaska Securities Act from criminal penalties; relating to time limitations in bringing court actions for violations of the Alaska Securities Act; relating to the affirmative defense of timeliness in court actions relating to securities; prohibiting certain lawsuits involving buyers of securities; relating to time limitations for bringing court actions involving the receipt of a written offer related to securities; relating to offers to repay buyers of securities; relating to notification of certain securities occupations regarding administrative hearings; relating to fees established by the administrator; relating to a sale, a purchase, or an offer to sell or purchase under the Alaska Securities Act; relating to the locations of offers to buy or sell; relating to consent to service; amending the Alaska Securities Act definitions of 'agent,' 'broker-dealer,' 'person,' 'Securities Act of 1933,' and 'security;' defining for purposes of the Alaska Securities Act 'advisory client,' 'advisory fee,' 'advisory services,' 'Bank Holding Company Act of 1956,' 'clients who are natural persons,' 'federal covered adviser,' 'federal covered security,' 'Federal Deposit Insurance Act,' 'Home Owners' Loan Act,' 'investment adviser representative,' 'Investment Advisers Act of 1940,' 'investment advisory business,' 'investment advisory contract,' 'Investment Company Act of 1940,' 'NASDAQ,' 'National Securities Markets Improvement Act of 1996,' 'notice filing,' 'place of business,' 'principal place of business,' 'Securities Exchange Act of 1934,' 'securities business,' 'state investment adviser,' 'substantial portion of the business,' 'supervised person,' and 'viatical settlement'; relating to the title of the Alaska Securities Act; relating to the definitions in the Alaska Securities Act of 'assignment' and 'investment adviser'; relating to implementation of the changes to the Alaska Securities Act; and providing for an effective date." CHAIRMAN ROKEBERG called on Franklin Terry Elder from the Department of Commerce and Economic Development. Number 0053 FRANKLIN TERRY ELDER, Acting Director, Division of Banking, Securities and Corporations, Department of Commerce and Economic Development, stated HB 83 is the son of HB 486 from last year. It amends the Alaska Securities Act and brings it into compliance with the changes in federal securities laws - the National Securities Markets Improvement Act (NSMIA), passed in 1996. The Act created a new kind of security called a covered security which is preempted from state registration. There is also a new kind of investment adviser called a covered adviser which is also preempted from state registration. However, in order to be revenue neutral and to continue giving anti-fraud authority over the securities as well as the investment advisers, Congress allowed the states to require notice filings and fees, and gave them a three-year window to change their statutes and regulations. Most of HB 83 is for that purpose, and the most of the language for the NSMIA-related changes was drafted by the North American Securities Administrators Association (NASAA), an organization comprised of the securities administrators across the states, Mexico, Canada, and the District of Columbia. NASAA, among other activities, writes the "uniform securities act," drafting uniform legislation for the states to use. Alaska is one of 38 or so states that has adopted the "uniform securities act" to maintain uniform securities regulations across the states. House Bill 83 also updates language and makes changes to the Alaska Securities Act according to experience and NASAA recommendations. A lot of those changes were also drafted by NASAA; for example, the provisional registration for Canadian brokers giving reciprocity to U.S. brokers and the credit investment exemption. He noted that 70 percent of the bill is related to NSMIA and 30 percent is not related to NSMIA. When HB 486 was introduced last year letters of support were submitted from the Investment Company Institute (ICI) and the Investment Counsel Association of America (ICAA) and they have indicated that there is no problem in using their letters again to support HB 83. In addition, this time around there are two more letters of support from industry associations and a letter of support from NASAA that have been included in the bill packet. Number 0570 CHAIRMAN ROKEBERG asked Mr. Elder whether it would be possible to get updated letters because these refer to the other bill. He noted the other body might be more particular. MR. ELDER replied he would see what he could do. Number 0597 CHAIRMAN ROKEBERG referred to Section 65, page 61, and suggested going over some of the definitions to get a better understanding of securities. For example, he has difficultly distinguishing the terms "broker-dealer", "covered securities", "investment adviser", "federal covered adviser" and "investment adviser representative". Number 0693 MR. ELDER explained, in current law, investment advisers are the people who give investment advice on securities for compensation. A broker-dealer is a firm that effects security transactions, such as Salomon Smith Barney Incorporated or Merrill Lynch and Company, Incorporated. Agents are the people who work for broker-dealers and charge a commission. An agent of an issuer is a person who represents the issuer of a security. For example, small companies may sell securities themselves thereby effecting the transaction and acting as an agent. Therefore, an agent may be an agent of an issuer or an agent of a broker-dealer. These players are only modestly changed by HB 83, except for investment advisers. NSMIA created "federal covered advisers" - those who manage $25 million or more in assets - and mandates them to register with the U.S. Securities and Exchange Commission (SEC). The state investment advisers, however, register only with the states. Number 0930 CHAIRMAN ROKEBERG asked Mr. Elder the scope of an adviser's work and how it is differentiated from broker-dealer agents. MR. ELDER replied advisers sell specific portfolio advice, while broker-dealer agents sell transactions. For example, an adviser could suggest buying 100 shares of Eastman Kodak Company. CHAIRMAN ROKEBERG asked Mr. Elder whether the term "financial planner" is more characteristic of an adviser. MR. ELDER replied they call themselves all sorts of things, but the state calls them "investment advisers." Number 1037 CHAIRMAN ROKEBERG asked Mr. Elder whether a person can be an agent for a broker-dealer as well as a federal covered adviser. MR. ELDER replied yes if referring to agents. A person is more likely to be an agent for a broker-dealer and an investment adviser representative for a federal covered adviser. MR. ELDER continued. In relations to the 100 shares of Eastman Kodak Company example, a broker-dealer agent can effect the transaction. Sometimes they are combined into one. In other words, the person giving the investment advice can also effect a transaction as well. The current law does not have "federal covered advisers", "state investment advisers", and "investment adviser representatives" - the same as agents to a broker-dealer. These terms have been added to conform to NSMIA. Even though states can no longer require federal covered advisers to register with them, they "may" require them to file a notice and pay a fee. The states also retain authority for anti-fraud provisions in the event a federal covered adviser perpetrates a fraud. Number 1210 CHAIRMAN ROKEBERG asked Mr. Elder why the language reads "may" instead of "shall". MR. ELDER replied he isn't sure because they are paying fees now. The division already has regulations drafted setting a fee schedule, assuming the bill passes. NSMIA says states "may" require a notice filing and fee, therefore, it is allowed by the federal government. CHAIRMAN ROKEBERG asked Mr. Elder whether he is using a discretionary "may" to draft regulations to mandate a filing and fee. MR. ELDER replied that's correct. There will be a fee. MR. ELDER continued. The bill, therefore, flushes out the investment adviser side entirely and brings it into compliance with federal law. It also adds the terms, "covered adviser", "state investment adviser", and "investment adviser representative" to state law. Since 1996 the division has required them to file a notice and pay a fee and they have been doing that. Number 1328 CHAIRMAN ROKEBERG asked Mr. Elder whether major broker-dealers before 1996 were not paying a fee to the state. MR. ELDER replied, no, they were paying a fee. The bill really does not affect the broker-dealers. NSMIA affects broker-dealers by saying that states can no longer require books and records to be kept any differently than what the SEC requires. Number 1364 CHAIRMAN ROKEBERG asked Mr. Elder whether that is where the three years for the retention of records comes from. MR. ELDER replied no. In the past every state could establish rules, regulations and statutes for keeping books and records. NSMIA says that from now on the SEC will do that. In other words, the states cannot make any financial requirements of the broker-dealers that are different than what the SEC requires. It affects Alaska because before 1996 the state required broker-dealers to post a $5,000 bond. That is about the only change to broker-dealers in the bill. However, investment advisers on the other hand will notice a lot in relation to their registration with either the SEC or the states. Number 1438 CHAIRMAN ROKEBERG asked Mr. Elder whether investment advisers were registered with the state in some other capacity previously or will they be newly swept up. MR. ELDER replied most were registered with the state because everybody was an investment adviser. Number 1459 CHAIRMAN ROKEBERG stated, in response, that the numbers will remain the same, just the categories will change. MR. ELDER responded that is correct. Some will be state investment advisers and some will be federal covered advisers. MR. ELDER continued. The definition for an "investment adviser representative" is that established by the SEC in the bill. Number 1495 CHAIRMAN ROKEBERG stated he noticed that both the state and federal advisers are defined similarly. MR. ELDER responded that is correct. Number 1518 CHAIRMAN ROKEBERG asked Mr. Elder to discuss the fiscal note. A figure of $3.9 million is floating around. MR. ELDER replied the division has supplied an information-only fiscal note to give an idea of what would happen if the state did not bring its securities Act into compliance with federal law. Number 1569 CHAIRMAN ROKEBERG asked Mr. Elder where does the $3.9 million actually come from. MR. ELDER replied it is not delineated in the fiscal note because almost all of it comes from mutual fund filings. There are very few "regulation D 506" filings. The $25,000 for federal covered advisers was not included. In essence, the revenue impact reflects what would happen if the state didn't come into compliance with federal law and if mutual funds stopped paying filing and notice fees. Number 1625 CHAIRMAN ROKEBERG asked Mr. Elder where the notice fees are required in the bill. MR. ELDER replied they are required in Section 33, page 35, and explained it adds a new section [AS 45.55.075] to the Alaska Securities Act. The real impact, however, is on mutual funds, not just securities. CHAIRMAN ROKEBERG asked Mr. Elder where the bill says the money is coming from. MR. ELDER referred to page 35, lines 10-13 and read, "(a) unless otherwise exempt under AS 45.55.900, a security that is a federal covered security under 15 U.S.C. 77r(b)(2), (Securities Act of 1933), may only be offered for sale and sold into, from, or within the state upon the administrator's receipt of". Those are mutual funds... CHAIRMAN ROKEBERG interjected and asked Mr. Elder whether the money is in the filing fees. MR. ELDER replied, "Yes." CHAIRMAN ROKEBERG referred to page 35, lines 19-21, "(3) a notice filing fee as prescribed by the administrator for a notice filing under this section and, if necessary to compute the fee, a report of the value of the federal covered securities offered or sold in this state.", and asked Mr. Elder whether that is where the $3.9 million comes from. MR. ELDER answered in the affirmative. Part of the regulations that the division will be adopting will include fees for that as well. Number 1717 REPRESENTATIVE BRICE asked Mr. Elder how the fees are prescribed. MR. ELDER replied currently there is a $100 filing fee and a .1 percent of the dollar amount being registered here, with a minimum of $100 and a maximum of $3,000. For example, if an agency registered $100,000 of funds, there would be a $100 filing fee plus a $100 notice fee. Number 1775 CHAIRMAN ROKEBERG asked Mr. Elder whether the state received these funds before the passage of NSMIA. MR. ELDER replied correct. CHAIRMAN ROKEBERG asked Mr. Elder to inform the committee of the Fiscal Year (FY) 1998 and 1999 fees. MR. ELDER replied he didn't bring that information with him, but it is somewhere in the range of $3.2 million. CHAIRMAN ROKEBERG asked Mr. Elder whether the $3.9 million figure is based on a slight increase. MR. ELDER replied there has been substantial growth over the last several years. CHAIRMAN ROKEBERG asked Mr. Elder whether there is a fee adjustment at the end of the year for an actual amount versus the amount filed. MR. ELDER replied it is more complicated than that. In fact, the division plans to do away with its current type of fee structure and move toward a flat fee. Currently, they register in advance what they think they can sell in a good-faith effort, and send another application if it looks like they will exceed the amount. CHAIRMAN ROKEBERG stated they have to monitor the amount and periodically send the division additional notice fees to keep current. MR. ELDER responded correct. They keep current during their registration/notice period - two years - otherwise, the state will take action against them. Number 1902 CHAIRMAN ROKEBERG asked Mr. Elder whether each mutual fund within a family of funds has to be registered. MR. ELDER replied, yes, every portfolio has to be registered. MR. ELDER continued. The current fee structure requires a lot of extra paperwork for both the agent filing and the state. Thus, the trend among other jurisdictions is to go to a flat fee. The division doesn't care whether $1 million or $1 billion is sold. In addition, with a flat fee they won't have to worry about over-sells either. Everybody wins in a flat fee schedule. Number 1977 CHAIRMAN ROKEBERG noted that there are huge disparities between the size of funds. MR. ELDER noted, generally, the fees are minuscule compared to what else they do. CHAIRMAN ROKEBERG asked Mr. Elder whether he knows how much is taken in from Fidelity Investments, for example, compared to smaller funds. MR. ELDER replied the division doesn't keep track of each group, just the total for mutual funds. Number 2001 CHAIRMAN ROKEBERG asked Mr. Elder what would be the maximum income under the existing number from funds doing business in the state. MR. ELDER explained the division plans to set the fee at a rate that would equal the average. Therefore, some individual funds would see an increase and some would see a decrease. CHAIRMAN ROKEBERG noted it would be a disincentive for smaller funds compared to a sliding scale fee. MR. ELDER responded that is possible. The argument for a flat fee is the reduction of paperwork for both the industry and the state. CHAIRMAN ROKEBERG noted a sliding scale fee would also reduce the paperwork. MR. ELDER replied he thought about a sliding scale fee also, but it is real hard to implement. The industry knows about the flat-fee plan, and if it comes back with a different idea the division would be open to it. CHAIRMAN ROKEBERG asked Mr. Elder what other states are doing. MR. ELDER replied basically a flat fee. CHAIRMAN ROKEBERG asked Mr. Elder roughly what would be the fee. MR. ELDER replied more than what the division is thinking of charging. He hasn't seen a survey of all the states, but he recently saw a flat fee at $2,000 while the average for Alaska is about $1,100. CHAIRMAN ROKEBERG noted that Alaska is a small state. MR. ELDER agreed. The state that now charges a $2,000 flat fee used to have a sliding scale with a maximum of $1,600 instead of $3,000 like Alaska. CHAIRMAN ROKEBERG asked Mr. Elder what would it generate for Alaska in terms of money. MR. ELDER replied the total receipts should be the same with the same number of filings. Number 2097 CHAIRMAN ROKEBERG asked Mr. Elder, in that case, wouldn't the fiscal note be flat. MR. ELDER reiterated the fiscal note from the division is for information only. The real fiscal note is zero. The money is already being generated. Number 2123 CHAIRMAN ROKEBERG stated the fiscal note indicates a $500,000 increase a year, and asked Mr. Elder whether going to a flat fee would change it to a level number. MR. ELDER replied no. That number reflects the increase in filings. The average fee hasn't changed that much. Number 2139 CHAIRMAN ROKEBERG wondered, if the market goes backwards, whether the number of funds may... MR. ELDER interjected and reiterated the fiscal note from the division is for information only; its accuracy is not guaranteed. CHAIRMAN ROKEBERG asked Mr. Elder what is the optimum level, around $5 million, based on what there is now. MR. ELDER replied a reasonable estimate is between $4 million and $5 million. CHAIRMAN ROKEBERG asked Mr. Elder whether he is talking about $1,100 per month or what. MR. ELDER replied he is talking about $1,100 per filing fee for a notice. Number 2168 MR. ELDER continued. In reference to the definition section of the bill, a number of definitions were added because of the SEC, and the bill looks the way it does because of legislative drafting rules. For example, a definition was added for a "place of business", "principal place of business" and "providing investment advisory services" because they have to deal with how the SEC defines an investment adviser representative. In addition, Section 69 defines "security" and clarifies a potential misunderstanding of liability company interests. The language, ", notwithstanding the limitations of AS 45.08.103(c);", was included in last year's bill [HB 486] and the language, "fraction or pooled interest in a viatical settlement contract;", has been added to this year's bill. CHAIRMAN ROKEBERG referred to the definition of the word "viatical settlement" on page 69, subsection (38), and asked Mr. Elder why the bill is securing it when it is considered an insurance act. Number 2299 MR. ELDER replied it is securing it because there is question about what it is. Viatical settlements were created in order that a terminally ill person could sell his/her life insurance policy to a willing investor for a return. The return is a function of various assumptions based on how much an investor is willing to pay and how soon a terminally ill patient will die. Obviously, when the assumptions change, the returns change. Securities administrators around the country generally believe that when interests are sold in a viatical settlement a security is being created as an investment contract currently covered under the definition of securities. However, courts have decided on both sides of the issue. The problems in the rest of the country primarily result from poor disclosure and marketing. Most investors are told it is a guaranteed rate because the person is going to die, but in the case of Acquired Immune Deficiency Syndrome (AIDS) patients are living longer, causing those investors to lose money of which the risks were not disclosed. He cited an example of a viatical being advertised and sold in $5,000 increments with a guaranteed 42 percent rate of return. That is a security and the division would be willing to say it is an investment contract, but if actions were taken in court the state would have to prove jurisdiction. Number 2480 CHAIRMAN ROKEBERG asked Mr. Elder whether the division couldn't take action now because it doesn't have statutory authority. MR. ELDER replied the division could take action if it is egregious on the concept that it is an investment contract. TAPE 99-9, SIDE B Number 0001 CHAIRMAN ROKEBERG asked Mr. Elder if viatical settlements are not a security then what are the courts holding in non-jurisdiction. Are they insurance settlements? MR. ELDER replied the courts are finding that they are non-investment contracts, not a security and, therefore, of no consequence. In other words, the courts are not finding what they are but what they are not. He reiterated there are court cases throughout the country on both sides of the issue. He noted, that although NSMIA supports the bill, the viatical business does not support the bill. Number 0049 REPRESENTATIVE MURKOWSKI asked Mr. Elder whether the other states that recently passed this type of legislation included a viatical definition. MR. ELDER replied there are two or three states now that have viatical settlements proposed in their bills in the definition of "security". And, according to correspondence with other states, it appears that there are another six to eight states interested in including it in legislation. What is in the bill now seems to be the general consensus on the direction that other states are going. Number 0090 CHAIRMAN ROKEBERG asked Mr. Elder to provide the committee in writing information on case law relating to viatical settlements, why it is being done, and the other states involved to include in the bill packet. Number 0113 MR. ELDER stated that even though viatical was added to the definition of "security", it shouldn't be a full registration. Thus, the language, "(3) a security that represents a fractional or pooled interest in a viatical settlement contract.", was added to Section 34. It was added to the kinds of securities that are subject to registration by notification, something less than a full registration by qualification. Number 0172 CHAIRMAN ROKEBERG asked Mr. Elder whether there are provisions in the exemptions for this. In other words, what is the generic term for AS 45.55.080(a)? MR. ELDER replied a registration. CHAIRMAN ROKEBERG asked Mr. Elder whether the issuer has to meet the registration criteria. MR. ELDER replied yes. An issuer has to meet the registration criteria in AS 45.55.080(a). CHAIRMAN ROKEBERG noted that it doesn't really work with some of the other exemptions. MR. ELDER responded correct. Actually, exemptions are available to any issuer including issuers of fractional or pooled interest in viaticals. CHAIRMAN ROKEBERG asked Mr. Elder what the division calls this section. MR. ELDER replied it is called "registration by notification." CHAIRMAN ROKEBERG noted it seems like a simple or quick type of registration. MR. ELDER replied it is simple. Number 0263 REPRESENTATIVE HALCRO asked Mr. Elder to discuss the trends of violations in regards to consumer protections. MR. ELDER replied Alaska is blessed by its geography because it protects it from the bad guys who float between states. In the past few years, the kinds of problems have been with those who are not registered as opposed to those who are registered. The division has taken action against both kinds. He cited that a person in Anchorage was fined $25,000 for giving investment advice as a registered investment adviser when he was not registered. On the other hand, a registered investment adviser was fined $25,000 for effecting transactions outside the scope of his authority. In addition, a lot of things the division does to help investors don't always include formal actions. Mr. Elder cited a call from a woman who noticed unauthorized broker-dealer transactions of which the broker-dealer corrected and made her account whole again. No action was taken against the broker-dealer because it was discovered that her husband probably authorized the transactions, but Mr. Elder said he lectured the agency and its employees and gave them a warning. He also cited a case of a complaint against an unsuitable broker-dealer who was issued an order. Number 0464 CHAIRMAN ROKEBERG stated he assumed that most of the operating investment bankers in the state would be under SEC jurisdiction and not the state. Is that where it overlaps sometimes? MR. ELDER responded there is triple overlap on the broker-dealer side. They are generally members of the National Association of Securities Dealers (NASD), an industry association, registered with the SEC and the state. In the case of the investment adviser in Anchorage, that adviser was an agent of a broker-dealer that took action costing him another $15,000 for the same offense. Number 0516 REPRESENTATIVE HALCRO referred to Section 50 and noted that a new subsection has been added allowing the state to go after out-of-state violators. It sounds that it is more of a precautionary measure rather than responding to a trend. Number 0557 MR. ELDER explained Section 50 was not part of last year's bill. The subsection allows an order to be appealed to the superior court at which point the order is final. If it is not appealed then, of course, the order is final. But, once an order is final, the division can approach the superior court and ask that the civil fine be reduced to judgment without starting a hearing again, and register the judgment in whatever jurisdiction needed. The genesis of the subsection comes from a growing frustration in dealing with out-of-state violators of the securities Act. He cited last summer a Californian who wasn't registered ripped off an Alaskan investor. An order was issued and the Californian thumbed his nose at the state. The only thing the state could do was send the order to California and post the person's name on investigative bulletin boards. The section, therefore, was a proposal from the Department of Law as a means to file it in the offender's jurisdiction and to hit the offender in the pocket where it counts. The real danger for the future is from someone on the telephone or Internet who is not in Alaska. Number 0740 REPRESENTATIVE HALCRO asked Mr. Elder whether Sections 2 and 3, the revocation for noncompliance with child support enforcement requirements, involve the state's ability to affect people who don't pay child support, especially in relation to the appeal to the supreme court involving the revocation a driver's license. MR. ELDER replied he doesn't know. Licensing for a business is probably viewed differently than licensing to drive. One might be considered a privilege while the other might be considered a right. CHAIRMAN ROKEBERG interjected the Child Support Enforcement Division [Department of Revenue] covers occupational licensing. MR. ELDER stated the law requires the division to review a list of those who are deficient in both student loans and child support payments, but it can't take action. Therefore, it is implemented in Section 27, AS 45.55.060(a) by adding the language, "(11) is a person whose license renewal is denied under AS 14.43.148 or whose license issuance or renewal is denied under AS 25.27.244." Number 0877 REPRESENTATIVE HALCRO noted that the inclusion would allow the division to extract child support. However, if a license is taken away a person can't make a living, thereby rendering that person incapable of making child support payments. He asked Mr. Elder whether the intent is to use it as leverage. MR. ELDER replied he presumes that someone would do whatever it takes to keep a license. The current law requires the division to take action against a license if a person is delinquent. If there is a constitutional problem with it, either the Department of Law or Legislative Legal Counsel [Legislative Legal and Research Services, Legislative Affairs Agency] would have raised the issue. It was part of last year's bill. Number 1033 REPRESENTATIVE HARRIS asked Mr. Elder whether the bill just ran out of time last year or were there other complications and what were they, if any. MR. ELDER replied the bill ran out of time last year because it was in conference. A one-sentence amendment was placed in the bill by a member of the Senate relating to the Alaska Native Claims Settlement Act (ANCSA) and proxy filings in Section II B. It went through the House Labor and Commerce Standing Committee, the House of Representatives, and the Senate Labor and Commerce Standing Committee without a problem. The problem related to a lawsuit between a director of Cook Inlet Region, Incorporated (CIRI) and CIRI that caused concern. The House did not accept the amendment and the bill went into conference, at which point it died. House Bill 83 removes any sections dealing with ANCSA and proxy filings. Number 1237 CHAIRMAN ROKEBERG explained that some voted no because the bill was over 20 pages long. MR. ELDER noted that some felt it could be fixed the next year because of an October 1999 deadline. It makes his life more difficult, however, because he has to get the statute through the legislature and adopt regulations in the same year. Number 1275 CHAIRMAN ROKEBERG asked Mr. Elder what it cost the division in manpower, time and money because it did not pass last year. MR. ELDER replied it mostly cost time. There are only three securities examiners for the whole state and if one is taken out to work on legislation that is a one-third reduction in the effort to administer the securities Act. It was a significant hit on the division and Alaska because it continues to be a state that is not in compliance with federal law. He referred to a group of attorneys that file security applications with various states that have started discussing what to do about the states that have not complied with federal law. If Alaska does not come into compliance, it puts the $4 million to $5 million of annual fees at risk and the ability to help customers of state investment advisers or federal covered advisers. He explained what hits the SEC's radar screen is monumental in terms of dollars, and noting the individual mentioned earlier with a loss of $6,000 that the division helped get whole again would not have been helped by the SEC. Number 1479 CHAIRMAN ROKEBERG stated that is a good point. CHAIRMAN ROKEBERG referred to page 7, starting on line 31, "(2) [AN ASSIGNMENT OF THE CONTRACT MAY NOT BE MADE BY THE INVESTMENT ADVISER WITHOUT THE CONSENT OF THE OTHER PARTY TO THE CONTRACT; AND (3)]", and noted the language is being deleted. He asked Mr. Elder whether an adviser would be allowed to make an assignment with consent. MR. ELDER replied yes. The paragraph is simply being moved to Section 45.55.023 [Section 9]. CHAIRMAN ROKEBERG referred to Section 9, and asked Mr. Elder whether the categories are new. Number 1616 MR. ELDER explained it is language that NASAA developed. Section 9 includes investment advisers, broker-dealers and agents. A lot of what is in Section 9 is currently in regulation and the bill moves it to statute. However, there isn't a lot about the behavior of investment advisers and their representatives in statute because before NSMIA they were registered with the SEC. Now, because there are state investment advisers who do not register with the SEC, the rules needs to be codified in statute. The language is new, but not to the people in the business. There is nothing illegal in the bill that is legal now because they were covered by the SEC and those categories are in these sections. Number 1749 CHAIRMAN ROKEBERG referred to page 9, lines 24-25 and said: "What about short-selling? And, am I confusing the borrowing of a security for a short-sell with another technical mechanism? Don't you borrow securities to allow a placement or is it selling short? Or are you using just a colloquial term? It's not really borrowing?" MR. ELDER replied that's right. This refers to state investment advisers, federal covered advisers and investment adviser representatives, not broker-dealers. CHAIRMAN ROKEBERG referred to margin calls on selling (indisc.) money and noted that they are advisers, not investment bankers. MR. ELDER replied correct. Number 1849 CHAIRMAN ROKEBERG referred to page 10, line 25, "(A) compensation arrangements connected with advisory services to a client if the arrangements are in addition to compensation from the client for those services; and"... MR. ELDER interjected and stated that the subsection relates to the failure to disclose compensation arrangements other than what the client pays. CHAIRMAN ROKEBERG asked Mr. Elder whether a commission for recommending a mutual fund, for example, needs to be disclosed. MR. ELDER replied yes. Number 1979 REPRESENTATIVE HARRIS referred to page 10, line 19, "(10) charging a client an unreasonable advisory fee;", and asked Mr. Elder who determines an unreasonable advisory fee. MR. ELDER replied it is related to what is available in the local market. For example, if the market is charging 3 percent and someone is charging 15 percent, that would probably be considered unreasonable. REPRESENTATIVE HARRIS asked Mr. Elder whether it would have to be something fairly extreme before worrying about it. MR. ELDER replied yes, to take action. Number 1997 CHAIRMAN ROKEBERG referred to page 13, lines 17-18, "A broker-dealer and an agent shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of their business.", and asked Mr. Elder whether "commercial honor" is an artful term. MR. ELDER replied he likes the term. It was lifted out of other state securities Acts. Financial institutions should show commercial honor. Number 2051 CHAIRMAN ROKEBERG asked Mr. Elder what is commercial honor. Is it a different standard than chivalry and honor, for example? MR. ELDER replied commercial honor means full disclosure and treating people fairly. CHAIRMAN ROKEBERG wondered whether it needs to be defined. MR. ELDER noted that it is defined in the bill. Number 2104 CHAIRMAN ROKEBERG replied he disagrees. He said, "You got high standards of commercial honor then you're saying that's dishonest. That's a little different. I mean, your saying negative, but it's not defining it." MR. ELDER stated the intent is to take action on those acts that are enumerated in the bill. They are an embodiment of a violation of the standards of honor, just and equitable principles. CHAIRMAN ROKEBERG stated that when reading the bill this area slowed him down. He suggested talking further about it later. CHAIRMAN ROKEBERG referred to page 13, line 3, "(b) The conduct listed in (a) of this section is not the exclusive conduct prohibited by (a) of this section.", and asked Mr. Elder whether it is like the Uniform Code of Military Justice (UCMJ). MR. ELDER replied it provides the division with further authority to expand the conduct list by regulation. CHAIRMAN ROKEBERG noted it is a blank check. He asked whether it is part of the language in NSMIA. MR. ELDER replied it is part of NSMIA and drafted by NASAA. CHAIRMAN ROKEBERG stated it looks like the division is granting itself a significant amount of power. MR. ELDER replied it doesn't really change anything. Most violations are currently listed in regulation. However, by enumerating those violations in statute makes it more clear to those who read it. CHAIRMAN ROKEBERG announced the bill will be held over for further consideration. He hopes that it will be passed out of the committee on Friday, February 19, 1999.