Legislature(1999 - 2000)

02/17/1999 03:24 PM L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
                                                                                                                                
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.                                                                                         

Document Name Date/Time Subjects