SB 300 - UNIFORM COMMERCIAL CODE:ART 8(SECURITIES) Number 866 CHAIRMAN KOTT announced the committee would address SB 300, "An Act relating to the Uniform Commercial Code, primarily to investment securities; amending Rule 8(d), Alaska Rules of Civil Procedure; and providing for an effective date." SHERMAN ERNOUF, Legislative Assistant to the Senate Labor and Commerce Committee, informed the members that the bill is a housekeeping bill. He said the committee introduced SB 300 by request of the Uniform Law Commission. He said, "If I had to boil this down to one main topic, which really is the full substance of the bill, its one main theme is the recognition of current practices in the handling of investment securities by electronic means instead of paper and by the use of a lot clearinghouse corporations and securities intermediaries have popped up. This bill just updates the UCC code to recognize electronic handling of securities. It passed the Senate 20 to 0. Really, there is no opposition stated. Its been endorsed by quite a few people." MR. ERNOUF indicated many states have adopted it and there are currently a quite a few states that are going through this process to get this on the books as fast as possible. Number 965 REPRESENTATIVE PORTER asked if this is basically what was done to the banking code as far as wire transfers. ART PETERSON, Uniform Law Commissioner, National Conference of Commissioners on Uniform State Laws, explained the bill is related in that it uses modern technology, but it deals with a whole different set of issues and circumstances. It is to address the modern world. The current code was written several decades ago. Number 1006 L. S. (JERRY) KURTZ, JR., Member, Code Revision Commission, said the bill is an attempt to get the law to catch up with the computers. He said he would point out that this is a 1994 proposal by the Uniform Law Commission. As of last September 30, 13 states had already adopted it, including several important commercial states, namely Illinois and Texas. He noted Washington and Oregon have recently adopted this and other states are currently in the same process. Number 1608 WILLIS KIRKPATRICK, Director, Division of Banking Securities and Corporations, Department of Commerce and Economic Development, was next to address SB 300. He informed the committee that SB 300 is really not that much different if it is compared with AS 45.08. There are some significant changes in it and those changes are basically in the area of control and the action of intermediaries. The action of the intermediaries takes place in the electronic transfer of funds and in the electronic transfer of shares of ownership. Those go to a clearinghouse or to an intermediary or a third party who handles those types of transactions. Mr. Kirkpatrick explained in the mid 1970s, this was handled by the exchanges through a depository trust corporation that held in the depository certificates and everybody would do a bookkeeping entry as a debit of credit against those certificates. Today, with the electronic age, electronic transfers and the activity that is occurring, we are getting more and more into a "certificateless" world. The law needs to be updated to protect those who have certificates with the intermediaries and those who have liens and actions against those certificates. He said it protects all parties in relationship to those types of transactions. Mr. Kirkpatrick said the bill is a good bill and he urged passage. Number 1175 REPRESENTATIVE ROKEBERG referred to page 31, line 28, and said it speaks to lost stock certificates. The words "bona fide purchaser" were changed to "protected." He said he isn't sure he understands that. MR. KIRKPATRICK said he believes that protected is covered under the definition of a protected certificate holder. He said it may be explained in Section 113. REPRESENTATIVE ROKEBERG said the reason he asked this question is because about 25 years ago he bought his father one stock in Exxon and a few other shares in other companies. He said he is looking for one of the certificates because he wants to sell the stock. MR. KIRKPATRICK said he may be able to get a replacement for the certificate through the transfer or registered bank. He said he doesn't believe that is the protected definition in this instance. Number 1282 REPRESENTATIVE ROKEBERG referred to the state of New York not adopting this. He said the security exchanges are in the state of New York. MR. PETERSON said he has called the Chicago office of the Uniform Laws Conference and the reason it hasn't been enacted in New York was that the New York Bar was studying it in great detail. He said there was some segment of the bar that was causing some delay. They have since come out with a report, which was favorable. It was supposed to go to the New York legislature in March. It may be currently pending in the New York. The plan was that it would be introduced this spring and it is expected to pass in New York very shortly. MR. PETERSON explained that in the 1960s, there was a major paperwork crises hitting the New York Stock Exchange and all the security exchanges. Two things stemmed in response to that. One was the developing concept of the uncertificated security. So if General Motors wanted to issue Representative Elton a share of stock, they don't send him a piece of paper saying, "Dear Kim, here is your piece of paper." They would deal through a depository, an intermediary that in fact is between the issuer, General Motors, the stock broker and the ultimate purchaser, Kim Elton. Mr. Peterson explained that because of that development to the point where this clearing corporation system so dominates the scene now, something like 80 percent of all shares are held through that clearing corporation in New York which is called a depository trust corporation, there are very few instances of pieces of paper flying around through the mail back and forth, but there are still some. So this bill retains some of the provisions of the old UCC to take care of that situation, but it also adds a new group of sections recognizing what is called the "Indirect Securities Holding System." Representative Elton would have his account with his broker, Merrill Lynch. Merrill Lynch, in turn, would have its account with a depository clearing corporation in New York, and that corporation would then be in touch with General Motors. He said there are several intermediaries between the ultimate purchaser, the ultimate holder who has the right to receive the benefits of that share of stock, and the issuer of that stock, the corporation that is doing the manufacturing, etc. Mr. Peterson said because the law has failed to keep up with that, we need to have this modernized version of the Uniform Commercial Code enacted. MR. PETERSON explained the second thing that developed was the use of computers. This electronic technology that has mushroomed over the last two decades. It is such a different scene now from the way it was in the 1960s, and the law has not kept up with that. This bill is supposed to try to do so. He said in a few years there will be another bill that does whatever the advances are then. Mr. Peterson said SB 300 is overwhelmingly supported by all of the folks in the securities industry. He said he isn't sure whether the committee members' files includes a series of letters from people of the New York Stock Exchange, the American Stock Exchange and the Depository Trust Company. The American Bar Association supports the changes. He noted it was developed by the National Conference of Commissioners in Uniform State Laws. Mr. Peterson explained the National Conference of Commissioners put out a section by section commentary if the committee wished to have a copy. He urged the committee to pass the bill. Number 1618 CHAIRMAN KOTT asked Mr. Peterson to make the section by section analysis available. Number 1655 REPRESENTATIVE PORTER made a motion to move SB 300 out of committee with individual recommendations and a zero fiscal note. CHAIRMAN KOTT asked if there was an objection, Hearing none, SB 300 was moved out of the House Labor and Commerce Committee.