Legislature(2017 - 2018)BELTZ 105 (TSBldg)
03/19/2018 06:00 PM LABOR & COMMERCE
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HB 170-AK SECURITIES ACT; PENALTIES; CRT. RULES 6:56:57 PM CHAIR COSTELLO reconvened the meeting and announced the consideration of HB 170. [CSHB 170(JUD) was before the committee.] 6:57:06 PM SENATOR MEYER made a motion to clarify that the committee was considering version O that passed the House. CHAIR COSTELLO objected for the sake of discussion. 6:58:03 PM CRYSTAL KOENEMAN, Staff, Representative Sam Kito III, Alaska State Legislature, Juneau, Alaska, presented HB 170 on behalf of House Labor and Commerce Committee. She said this was brought to the House Labor and Commerce Committee by the Department of Commerce, Community and Economic Development. It amends the Alaska Securities Act. Security statutes are separated from statutes related to the Alaska Native Claims Settlement Act (ANCSA) to facilitate better understanding of both. It deters investment scams using Alaska entities and harming Alaskans. It helps protect older and vulnerable adults from financial exploitation by requiring financial professionals to report suspected exploitation and giving the reporting professionals immunity. It enhances penalties against those who harm older and vulnerable Alaskans. It also updates entity and law references that currently use notice by telegrams. It is an overall update of the Securities Act. 6:59:33 PM KRISTY NAYLOR, Acting Director, Division of Banking and Securities, Department of Commerce, Community and Economic Development (DCCED), Anchorage, Alaska, said HB 170 is very important to the operation of the division in its regulation of securities in Alaska and also to Alaska consumers. The Alaska Securities Act provides the legal framework for offering or selling securities in Alaska or to Alaskans, including registration of the financial product and sales force, and enforcement action against those who violate the act. It also regulates ANCSA Corporation and shareholder proxy provisions. MS. NAYLOR said securities is one of 12 statutory programs that the division regulates and is the largest single program area. Just over 95,000 people are licensed to sell securities in Alaska. There are also over 1,200 security firms. The growth over the last few years has been significant. MS. NAYLOR said HB 170 solves two main problems with current law. First, the current law is outdated and hasn't kept up with the industry. The current Alaska Securities Act went into effect in 1961. The Act has only been changed in any significant way three times in almost 60 years. MS. NAYLOR said second, consumer protections and enforcement provisions are insufficient. Alaskans have been harmed by people who have violated Alaskan laws and low administrative, civil, and criminal penalties do not serve as a significant deterrent. They are low enough to be seen as the cost of doing business. 7:02:23 PM MS. NAYLOR said the bill solves the problem by modernizing current law: • Updates outdated provisions to better align the law with current industry practices (Current statute refers to entities that no longer exist, federal statutes that have changed over time, and allows notification by telegram.) • Incorporates the Innovating Alaska Act, which allows intrastate crowdfunding to help grow Alaska businesses • Eliminates most filings that must be made with the Division • Separates ANCSA from securities, so the two programs can be regulated separately • Improves organization 7:04:07 PM MS. NAYLOR said the bill enhances consumer protection: • Increases administrative, civil and criminal penalties, especially for those who harm vulnerable people (Current enforcement provisions allows a maximum civil penalty of $25,000 per person who commits a violation. The division has recently investigated frauds that involved millions of dollars of losses. The new law would allow a fine of $100,000 per violation. The fines can be increased if the victim is a senior or vulnerable adult.) • Allows for bad actors to be barred from the industry • Requires brokers and advisers to report suspected financial exploitation of seniors and vulnerable adults to the Division and Adult Protective Services • Improves investor education provisions, allowing for a portion of collected civil penalties to be deposited into a fund that the legislature may allocate for investor education • Facilitates continuing education for brokers and advisers 7:06:26 PM She highlighted the following securities scams in Alaska: Fortune Oil and Gas, LLC--Texas-based oil and gas scam that resulted in a $3.1 million loss to Alaskans J. Randall Gladden--Unregistered salesperson came to Alaska to give financial presentations to local church communities after he had been suspended by federal regulator from acting as a securities agent Global Arena Capital Corp--Unregistered NY firm and six employees cited for soliciting then selling junk bonds to a retired and ailing Alaskan halibut fisherman Garden State Securities--agent from Global went to Garden State and attempted to sell risky investments to same customer without a license in Alaska (The firm was licensed in Alaska. They withdrew from Alaska and paid the maximum civil penalty without blinking an eye.) 7:10:20 PM SENATOR STEVENS asked why it is necessary to separate ANCSA from other securities. MS. NAYLOR explained that the regulation of corporate proxy solicitations is a securities function that the SEC [Securities and Exchange Commission] provides for publicly traded corporations. Alaska is the only state that regulates proxy solicitations. Ordinarily the SEC would regulate them. ANCSA corporations are outside of federal regulations and not covered by SEC regulations. It makes sense to separate them and deal with them as a unique Alaska entity. If changes need to be made to either the Securities Act generally or ANCSA provisions, that can be done more appropriately if they are separated. SENATOR STEVENS asked if they would still be regulated but separately. MS. NAYLOR said yes. SENATOR GARDNER noted that when she described the Global Arena Capital Corporation fraud, she mentioned that the division could not order restitution. It had to be a negotiated process. She asked why it had to be negotiated. MS. NAYLOR said no provision in the enforcement section of the current law allows the division to order someone to pay restitution. HB 170 has a provision to allow them to order restitution. SENATOR GARDNER asked how a securities agent differs from a stockbroker or investment advisor. MS. NAYLOR said they're the same. SENATOR MEYER said he was looking for a definition of securities in the bill but might have missed it. He assumes securities are stocks, bond, life insurance, and banking CDs. MS. NAYLOR directed attention to page 103 of the bill. They include stocks, bonds, limited partnership interests, certificates of deposit. It's a long list. It's the same as in current law. SENATOR MEYER asked if the state has jurisdiction over the internet or if that is a federal issue. MS. NAYLOR said they have jurisdiction over offers and sales of securities over the internet. Anything coming or going into the state would be within their jurisdiction. SENATOR MEYER asked if he can report an internet solicitation to invest in an oil well in Russia. MS. NAYLOR said yes. 7:16:40 PM SENATOR MICCICHE referred to the civil penalties on page 83, line 20. He asked why there isn't a percentage of the damages when there could be millions in losses. He asked how far the bill can go in recovering those losses. MS. NAYLOR said the $100,000 is the civil penalty that the bad actor would pay the state for violating the statute. Adding in a restitution provision means they could order up to 100 percent restitution of the loss. SENATOR MICCICHE observed that the statutory civil penalty can range from $100,000 to $300,000 and the restitution could include 100 percent of the loss. MS. NAYLOR said that's correct. 7:19:35 PM LEIF HAUGEN, Acting Chief, Enforcement and Securities, Division of Banking and Securities, Department of Commerce, Community and Economic Development (DCCED), Anchorage, Alaska, provided the following sectional analysis for HB 170: Article 1. General Provisions - p. 15 Same as current law. Securities must be registered before offer or sell, unless federally covered or exempt. Article 2. Exemptions from the Registration of Securities p. 15 • Incorporates the current statute regarding small intrastate security offerings that are known as crowdfunding. • Adds provisions allowing the division to prohibit persons who have committed crimes or regulatory violations from using exemptions from registration and provides the administrator the authority to waive or change exemption requirements. Article 3. Registration of Securities and Notice Filing of Federal Covered Securities p. 30 • Changes would require registration statements to be on file with the administrator for 20 days. • Increases fees for late filings. • Explains the joint regulations of viatical settlement interests by the Securities and Insurance statutes. • Requires the administrator to establish regulations explaining what conduct may be fraud upon purchasers. SENATOR GARDNER referred to Article 3 Section 45.56.305, "registration statement must be on file with the Administrator for 20 days (may be reduced by regulation)." She questioned putting something in statute that may be reduced in regulation. MR. HAUGEN acknowledged that was not taken into consideration. 7:21:12 PM At ease. 7:21:24 PM CHAIR COSTELLO reconvened the meeting. SENATOR GARDNER said maybe someone could answer that in due course. 7:21:44 PM MR. HAUGEN continued the sectional for HB 170. Article 4. Broker-dealers, Agents, Investment Advisers, Investment Adviser Representatives and Federal Covered Investment Advisers p. 42 Firm, salesperson, and adviser registration (licensing) provisions are reorganized into one article, making it more user-friendly than current law. • Includes a new exemption for broker-dealers and agents, as well as investment advisors and representatives, to facilitate on-going broker- customer relationships with customers who have established a second or other residence in other states. • Changes annual renewal to December 31 from December 1 for easier state and firm processing. • Adds a provision that exempts merger and acquisition brokers from registration. • Includes, within Article 4, the types of business covered regarding agent registration requirement and exemptions instead of in the definition section. • Includes investment adviser registration requirement and exemptions mirroring a broker-dealer agent requirements in Article 4. • Extends time, unless the registration is denied, for automatic registration of broker-dealers, agents, investment advisers, and investment adviser representatives. • Clarifies process for an organizational change for broker-dealers and investment advisers. • Requires that broker-dealers or investment advisers file a notification of termination of employment of agent or representative with the administrator. • Extends time of the effective date of registration withdrawal. • Adds provision allowing filing fees to be established by regulation. • Adds provision allowing the administrator to set continuing education requirements by regulation. • Adds provision adding model legislation to protect vulnerable adults from financial exploitation. • Adds provision allowing the administrator to bar a person or firm from registration including for actions taken by other regulators. • Increases civil penalty for registrants from $2,500- $10,000 per violation to up to $100,000 per violation. 7:23:22 PM Article 5. Fraud and Liabilities p. 70 • Allows administrator to define prohibited conduct by regulation. • Adds a citation to affirmative defense in criminal law regarding the evidentiary burden. • Clarifies that registered persons are not liable to other registered persons, under state defamation laws, for statements contained in disclosure records required to be filed with the administrator for purposes of licensing and potential discipline. Article 6. Administration and Judicial Review p. 72 • Adds a new provision allowing the administrator to develop and implement investor education initiatives and accept grants or donations for investor education. • Requires the administrator keep records according to a retention schedule and outlines publicly disclosable documents. • Clarifies and specifies record confidentiality. • Expands opportunity for coordination with governmental units, regulatory organizations for collaborative efforts including regulation and enforcement to reduce the burden of raising capital by small business. • Creates an investor education and training fund within the general fund. • Combines existing AS 45.55.950 and 45.55.970 and clarifies that GAAP compliant financial statements may only be required as allowed by federal law. • Separates out and clarifies administrative, civil, and criminal enforcement provisions. • Increases to 30 instead of 15 the number of days respondents can request to review a final order. 7:24:45 PM SENATOR GARDNER asked what "registered persons are not liable to other registered persons under state defamation laws for statements contained in disclosure records required to be filed with the administrator for purposes of licensing and potential discipline" in Article 5 meant. MR. HAUGEN said FINRA [Financial Industry Regulatory Authority] has a system called CRD (Central Registration Depository), where the division reviews the registrations of all agents seeking registration in Alaska. In other states firms felt they couldn't be candid about an agent termination or investigation of an agent. California and New York have adopted absolute immunity. This would give qualified immunity to disclose so other firms will know before hiring an agent and the state will know as well. SENATOR STEVENS asked for the definition of a vulnerable adult. 7:26:51 PM DEB ETHERIDGE, Deputy Director, Senior and Disability Services, Department of Health and Social Services (DHSS), Juneau, Alaska, said they are seniors and adults with disabilities who lack the capacity to protect themselves from harm. SENATOR MICCICHE observed that both are defined in statute. MS. ETHERIDGE said that's correct. 7:28:47 PM MR. HAUGEN continued the sectional for HB 170. Article 7. Miscellaneous and Additional General Provisions (includes definitions) p. 93 • Expands recovery of expenses from current AS 45.55.915 to cover all examination expenses including staff time, travel and per diem. • Facilitates filing of electronic records and signatures. • Contains new definitions. 7:29:20 PM CHAIR COSTELLO opened public testimony on HB 170. 7:29:31 PM KEVIN ANSELM, representing self, Matanuska-Susitna Valley, said she is a former director of the Division of Banking and Securities. She related that one of the primary reasons for passing HB 170 is to separate ANCSA provisions from other securities provisions. Much of the current Alaska Securities Act does not apply to ANCSA issues and when any changes are proposed there is concern that there will be unintended consequences. The bill also modernizes the statutes, lessens the burden of dual state and federal regulations, streamlines the registration, and protects investors. 7:33:52 PM CHAIR COSTELLO closed public testimony on HB 170 and held the bill in committee. SENATOR MEYER asked who would opposed the bill. MR. HAUGEN said other than scammers nobody is opposed to it. SENATOR MICCICHE asked if it's clear when fraud is committed. MR. HAUGEN said the fraud the division has seen involves someone approaching the investor and the investor doesn't see the return promised. Upon investigation, the division has discovered that there was no product or investment. The division has tools to identify when fraud has occurred as opposed to when an investment was a poor choice. [HB 170 was held in committee.]