HOUSE BILL NO. 194 "An Act repealing and reenacting the Alaska Securities Act, including provisions relating to exempt securities and transactions; relating to registration of securities, firms, and agents that offer or sell securities and investment advice; relating to administrative, civil, and criminal enforcement provisions, including restitution and civil penalties for violations; allowing certain civil penalties to be used for an investor training fund; establishing increased civil penalties for harming older Alaskans; retaining provisions concerning corporations organized under the Alaska Native Claims Settlement Act; amending Rules 4, 5, 54, 65, and 90, Alaska Rules of Civil Procedure; and providing for an effective date." 8:48:10 AM Vice-Chair Saddler MOVED to ADOPT the proposed committee substitute for HB 194, Work Draft 29-GH1060\G (Bannister, 4/12/16). There being NO OBJECTION, it was so ordered. BRODIE ANDERSON, STAFF, REPRESENTATIVE STEVE THOMPSON, explained the changes in the Committee Substitute. He related that the change corrected language from a conceptual amendment adopted in the previous committee to match the intent of the amendment. He delineated that one correction was located on page 101, line 2 and deleted the number 19 that was replaced by the number 18. He explained that the number reflected the age of maturity. In addition, on page 101, line 5, the words "or disappearance" were deleted and the words "dementia or Alzheimer's disease" were inserted. KEVIN ANSELM, DIRECTOR, DIVISION OF BANKING AND SECURITIES, DEPARTMENT OF COMMERCE, COMMUNITY AND ECONOMIC DEVELOPMENT, reported that the legislation was a re-write of the Alaska Securities Exchange Act and much of the language remained the same. She provided a brief overview and highlighted the changes. She outlined that the bill separated securities statutes from the Alaska Native Claims Settlement Act (ANCSA) related statutes to reduce confusion and improve the understanding of both acts. The bill removed the securities statutes in AS 45.55 and added a new chapter, 45.56. The legislation "synthesized" the Securities Act with other state's laws by adopting relevant provisions of the Uniform Securities Act (2002) to make it easier for businesses, entrepreneurs, and investors to understand their rights, responsibilities, and opportunities. She furthered that the bill recognized and incorporated current securities industry terms and standards. The legislation opened equity crowd funding opportunities and derailed investment scams by increasing civil penalties. The penalties could be used to provide investor, consumer, and entrepreneurial education via legislative approval. Finally, HB 194 tripled penalties for offences against senior citizens or vulnerable adults. She provided background regarding the securities industry in Alaska. She reported that by the end of 2015 the state had 1,234 registered broker/dealer firms, however only one firm was Alaskan. She remarked that Alaska had 765 investment advisors and only 30 firms were "domiciled" in the state. In 2015, 90,340 financial sales persons were licensed in Alaska and less than 1000 were domiciled here. She observed that the state received 6,600 securities filings each year and most were from out-of-state. In general, the industry was compliant with state laws. Representative Munoz joined the meeting. Ms. Anslem continued to address the bill. She relayed that Alaska's security industry paid approximately $13 million per year in licensing and filing fees and the bill did not affect the fees. The budget for the division was $3.5 million per year. She informed the committee that the division investigated and took enforcement action against securities firms, agents, and issuers, if necessary. In the last four calendar years the division had taken 54 actions against securities related firms and sales persons. She offered that most actions were settled through consent agreements, and all civil penalties went directly to the General Fund (GF). The division took default orders against the six cases that weren't settled. She discussed three of the unsettled cases to emphasize the importance of the enforcement actions and passage of the bill. She indicated that the current maximum fine was only $25,000 per respondent no matter how many violations were committed. 8:55:46 AM Ms. Anslem read the following from prepared notes: 13-1095-S, Fortune Oil & Gas, Russell Vera and R. Gerald Bailey: On February 3, 2014, the Division issued a Final Cease and Desist Order that included the MAXIMUM civil penalty of $25,000 against Respondents for selling over $3.1 million in unregistered limited partnership interests in Texas Oil and Gas ventures, mainly to Alaskan investors. 14-1442-S, Global Arena Capital Corp.: On October 23, 2015, the Division issued a Final Cease and Desist Order that included a civil penalty of $150,000 against Global Arena and six of its employees for violations of the Alaska Securities Act. Specifically, an employee of Global Arena contacted an elderly Alaska halibut fisherman in poor health and sold him junk bonds, although the investor believed he was buying something like a CD. The investigation revealed that the agents were instructed to offer and sell the junk bonds as "safe investments." The fisherman invested $27,000 in the bonds, which rapidly lost value. The firm even attempted to sell the investor other bonds, including one that would not reach maturity until the investor was 119 years old. The investment lost nearly $16,000. Global Arena was cited for deceptive and misleading representations and offering unsuitable securities. Currently, the Division can only get money back for a defrauded investor with an agreement with a bad actor to pay restitution directly to the investor. In this case, the Division successfully negotiated with one of the respondents to pay restitution to the investor. The Division may be able to recover some of the penalties through a SIPC action since the firm is now out of business. 15-1520-S/15-1520-2-S, Garden State Securities/Garland James: Garland James, previously an agent at Global Arena Capital Corp., went to work for Garden State. He cold-called the same elderly Alaskan fleeced by Global and tried to sell him $82,000 of a risky biotechnology stock. When he made the call, James was not registered as a broker-dealer agent in Alaska. The Division entered into a consent agreement with Garden State to withdraw its registration in Alaska and pay a $25,000 civil penalty (maximum) for failing to supervise James. The Division issued a Temporary Cease and Desist Order against James on March 21, 2016 for unregistered activity and for offering an unsuitable security to the investor, seeking a $25,000 civil penalty. 12-85-S, Troy Stafford and Patrick Williams: Stafford and Williams formed an Alaska LLC, GS Capital and WS Seafood. Stafford offered an Alaska resident an opportunity to invest $40,000 in WS Seafood and employment. Stafford also stated, falsely, that another corporation had promised a $10 million loan to assist the endeavors. The investor invested his money. The deal fell through and the investor never received the promised management role. The Division negotiated a settlement with the respondents, requiring them to offer rescission to the investor, which respondents agreed to do and promised to pay, even filing a notice of rescission with the Division. Respondents never paid the investor as promised. The Division issued a Cease and Desist and received a court order to enforce it. Ms. Anslem stressed that in regards to the last case; no statute mandated payment by the perpetrators to the investor. The current version of the legislation authorized enforcement. She continued to read the following: This bill would change the maximum civil penalty per violation to $100,000. You can see that with the kinds of cases we are talking about, there would be a wider range of potential civil penalties. The fines imposed for the six cases that I mentioned were $525,000. Under the provisions in HB 194, the potential fines could have reached over $7,000,000. Of course, one never knows what can actually be collected. Accordingly, we can't promise revenues with any certainty, thus the indeterminate fiscal note. 9:01:02 AM Co-Chair Thompson asked about the importance of the legislature adopting HB 194 during the current session. Ms. Anslem considered the bill critical. She explained that the division had worked for a number of years to update the securities law. She believed the legislation helped with revenue generation by increasing the civil penalties for businesses that harm Alaskans. Vice-Chair Saddler asked what specific sections or elements of the bill were the most critical. Ms. Anslem replied that most of the Alaska specific provisions dealt with exemptions from registration and carried over from the original act. She pointed out that the state had special exemptions for certain fishing cooperatives, the Commercial Fishing and Agricultural Bank (CFAB), and some mining exemptions. Vice-Chair Saddler asked whether there were sections or elements of the bill that were "more critical than the others." Ms. Anslem answered that the enforcement and crowd funding provisions were critical. She thought that the provisions that were the least critical were the exempt security sections: Article 1, 2, and 4, which remained very similar to the original. She deduced that another important element allowed the legislature to allocate up to one third of the funds collected from civil penalties for consumer and investor education. She revealed that consumer and investor education was part of the division's mission but currently was not funded. 9:04:51 AM Vice-Chair Saddler asked whether there were elements of the bill that required conformity with federal requirements. Ms. Anslem replied that there were a number of federal requirements that had evolved over time but were already referenced in the law. She elaborated that securities law was comprised of two components: a federal overlay, and a "blue sky law" that all states administered. One layer, the national securities law governed individual investors, dealers, and financial markets operations. She furthered that localized securities laws were handled by individual states. Alaska's laws written in alignment with other states aided business and investors, which allowed them to cross state lines and maintain compliance with federal and state laws. Vice-Chair Saddler noted that the National Conference of State Legislatures (NCSL) and the Council of State Governments issued uniform laws and recommendations. He asked who produced and administered the Uniform Securities Act. RENEE WARDLAW, ASSISTANT ATTORNEY GENERAL, DEPARTMENT OF LAW, ANCHORAGE (via teleconference), answered that the National Conference of Commissioners on Uniform State Laws [also known as the Uniform Law Commission (ULC)] drafted the legislation. Representative Wilson stated that she had not vetted the bill. She referred to the provisions on criminal enforcement that changed "willful" violation to "knowing" violation and asked for an explanation. Ms. Anslem responded that the Uniform Securities Act had included the term "willfully" that meant "intentionally." The Legislative Legal Services Agency attorney's requested the change to "knowingly." She clarified that the legal determination regarding state of mind and culpability in criminal law (Mens Rea) was hierarchically categorized as intentionally, knowingly, recklessly, and negligently. Knowingly was a lesser standard. Representative Wilson asked for verification that the standard for criminality was being lowered. Ms. Anslem replied in the affirmative. She cited AS 11.81.900 as the statute that contained the language. 9:09:40 AM Representative Wilson asked whether the division or court proceedings determined whether violations occurred and dispensed penalties. Ms. Anslem responded that there were three different types of actions that could be taken. She detailed that the first action was administrative taken by the Department of Commerce Community and Economic Development (DCCED). The second action was civil taken by either DCCED or "a private cause of action." The third action was criminal, taken by DCCED or the state. She clarified that the department had not taken on a criminal case to date and the Department of Law (DOL) could take criminal action if a case arose in a context outside of DCCED. Representative Wilson surmised that the department could find someone guilty through an administrative action and the new provisions could enact penalties up to $100,000 in restitution. She asked whether the department could add additional fines. Ms. Anslem replied that the civil penalty would be up to $100,000 per violation although the amount was typically negotiated on a consent basis. She stated that restitution was different. She explained that restitution was usually a repayment of lost money and that imposing both was possible. Representative Wilson wondered about the administrative appeal process. Ms. Anslem answered that an appeal was heard in the Office of Administrative Hearings and that decisions could be appealed to Superior Court. Representative Wilson contended that she had issues with the administrative hearing process. Co-Chair Thompson noted that Representative Edgmon had joined the meeting. Representative Pruitt wondered what the state could have done differently for the elderly gentlemen in the case against Garden State Securities if the new provision in HB 194 had been enacted at the time. Ms. Anslem answered that the state would have been able to order restitution and fine the firm for failure to supervise employees. The state would have been able to take action against every manager in the firm involved in instructing brokers to mislead investors. The findings would have led to the amount of culpability and the fines would have been adjusted accordingly. Representative Pruitt asked whether Garden State Securities was registered outside of Alaska. Ms. Anslem replied that Garden State was a New York firm. Representative Pruitt asked how the division enforced the law outside of Alaska and whether enforcement was part of the uniform law. He asked whether the laws assisted Alaska to pursue enforcement outside of the state. Ms. Anslem answered in the affirmative. She detailed the North American Securities Administrators Association facilitated states working together via very strong agreements among each other. She observed that often violations were not occurring in just one state and joint investigations were common. 9:16:42 AM Co-Chair Neuman asked whether the bill created a board or a committee. Ms. Anslem replied in the negative. Co-Chair Neuman asked whether any businesses were currently working in Alaska that would be impacted by the bill. Ms. Anslem responded that any of the changes in the bill did not apply to transactions that took place before the effective date of July 1, 2016. Co-Chair Neuman thought that businesses were not required to have an Alaska business license to practice in Alaska. Ms. Anslem replied that the question was related to the Division of Boards and Professional Licensing (CBPL) regarding whether a specific business was required to have a license. She commented that most of the firms in Alaska did have a business license in the state. Co-Chair Neuman referred to a "snow bird" carve out. Ms. Anslem answered that the snow bird carve out applied to firms that had clients from another state that travelled to Alaska and permitted the firms to carry out three transactions without being separately licensed. Co-Chair Neuman noted that via statute, money received from court judgements went into the General Fund. Ms. Anslem replied that HB 194 would not change the statute. Representative Guttenberg spoke about a letter from Samuels Yoelin Kantor LLP - Robert Banks dated February 1, 2016 (copy on file) that reported an issue with variable annuities for customers and brokers. He wondered why variable annuities were allowed to be sold in the state. He stated that he could not find the statute AS 45.56.605 (f) as cited in Mr. Banks letter in the bill or summary of changes (copy on file). He wondered whether the provision was deleted. Ms. Anslem replied in the affirmative - it had been removed from the current version of the bill. She explained that the Division of Insurance was the primary regulator of variable annuities, which were federally considered a security. However, states could regulate variable annuities depending on what provisions of the Uniform Securities Act a state adopted. Upon request by the insurance industry, the division chose not to adopt federal provisions relating to variable annuities. 9:21:25 AM Representative Guttenberg noted the importance Mr. Banks placed on the adopting the provisions. He asked how the regulations were "being covered" under the Division of Insurance. Ms. Anslem responded that the Division of Insurance was and always had been the sole regulator of variable annuities. Representative Guttenberg asked whether additional rules should be placed in the bill no matter who the regulator was. Ms. Anslem replied in the negative. She thought that the issue required more review and that the division might revisit the issue. Representative Guttenberg asked whether there was a history of problems with variable annuities in Alaska and wondered why the provisions were being left out of a bill dealing with conforming to national standards. He remarked that the letter reported issues related to lack of conformity to national standards. Ms. Anslem responded that issues around variable annuities were different in other states depending on the strength of its regulations. She offered that variable annuities were regulated on a national level by the Securities Exchange Commission (SEC) the successor [Financial Industry Regulatory Authority, Inc. (FINRA)] to the National Association of Securities Dealers who required licensing. The department licensed variable annuities brokers through both the Division of Banking and Securities and the Division of Insurance. She informed the committee that the insurance division had the sole authority to regulate variable annuities under Chapter 21 and provisions under 45.56 would be additional to the insurance division's regulations. She revealed that the decision had been made between the Division of Insurance and the insurance industry to do further study to determine how well the state was regulating the annuities. Representative Guttenberg asked whether there was a problem with the sale of variable annuities in Alaska. Ms. Anslem answered that there had been complaints, but she did not characterize them as a problem. Representative Gattis asked whether there were provisions in the legislation that were imperative to pass in the current session. She felt the bill was immense and wanted to be sure the committee did its due diligence but realized there were essential "clean-up" provisions that were necessary. 9:25:43 AM Ms. Anslem replied that the bill had a number of hearings through prior committees: House Labor and Commerce and the House Judiciary Committee. She deemed that the most important issues were enforcement, civil penalties and restitution, and consumer education. She expounded that the issues were about the protection of Alaskans and educating the public to protect them from "getting ripped off" and made aware of the resources available. Representative Gattis acknowledged that there was a lot of cleanup in the bill that could be done and wondered where emphasis could be placed. She wanted to know why passage of the bill "was pressing" in the current session. Ms. Anslem replied that the bill had been in process for the past 6 years in order to bring the state in compliance with the most recent act from 2002 and enable alignment with other states. She felt that passage of the bill was important for economic development in the state. In addition, the crowd funding provisions represented a new opportunity for Alaskans that authorized investing up to $5000 per year on Alaskan businesses and start-ups. She noted that SB 126 (Small Security Offerings) sponsored by Senator Mia Costello dealt with the issue and was moving through the legislature. She remarked that the crowd funding provisions were regulated solely by the state. 9:29:45 AM Representative Munoz asked about the 90,000 registered agents. She asked whether the number was unusually large compared to other states. Ms. Anslem answered that the number was a larger per capita number than in other states but not the largest. She indicated that one of the largest draws was Alaska's higher per capita income and higher per capita net worth. She believed that without solid enforcement opportunities the state would continue to be a target for offences. Representative Munoz asked whether crowd funding statutes existed in current state law. Ms. Anslem answered in the negative. She remarked that the only crowd funding allowed was through internet option like Kick Starter and the investor did not expect to get a return on investment. However, with equity crowd funding, returns on investment or other remunerations were possible. Representative Munoz asked whether the $5000 was a cumulative cap. Ms. Anslem answered that the limit was $5,000 per investment. Representative Munoz asked how violations were discovered. Ms. Anslem responded that cases were often referred to the division through federal or state law enforcement, complaints, the Securities Exchange Commission, and from a number of other sources such as the National Association of Securities administrators. 9:33:01 AM Vice-Chair Saddler noted that the fiscal note did not include or mention funding for consumer education. He asked for further information. Ms. Anslem replied that consumer protection was part of the department's mission. She provided the example of a $25,000 securities penalty collected, which allowed for approximately $8,000 to be deposited into an account under the control of the legislature who could appropriate the funds for consumer education and outreach events. Vice-Chair Saddler wondered how much money could possibly become available. Ms. Anslem answered that the penalties would have totaled approximately $7,000,000 and up to one third of the funds could have been appropriated for consumer education based on the cases she exemplified, under the maximum fines established in the bill. Representative Pruitt asked how long the division had been working on the bill. Ms. Anslem replied that work on the bill had been in progress since 2008. Co-Chair Thompson recalled hearing a version of the bill in the House Judiciary Committee six years earlier. Representative Pruitt asked about restitution and how the issue was addressed in the legislation. Ms. Anslem responded that restitution needed to be paid before an action was cleared. 9:37:33 AM Representative Pruitt asked about the crowd funding component of the bill. He asked whether the bill mirrored other states regulation or whether it was adjusted for Alaska. Ms. Anslem answered that the crowd funding provisions in the bill were simpler when compared to other states. The crowd funding was a simple process that helped get entrepreneurs off the ground. The bill did not require escrow but required compiling information about the business but excluded a business prospectus requirement due to the small population of the state and resulting transparency. She noted that the cost to require use of a broker dealer was very high and not included in the legislation. Her goal was to ensure that the information about the business provided to the investor was accurate. The state was considered a "full disclosure" state but not a "merit" state. Representative Pruitt asked if the bill ensured crowd funding consumers that "if something went sideways they would potentially be made whole." Ms. Anslem replied that it was related to the same provisions she had already discussed. Representative Pruitt asked about the mechanism to safeguard that the new business was legitimate. He asked what elements were in place to ensure oversight. Ms. Anslem answered that the elements included; a filing requirement that was scrutinized by securities examiners, background checks, and Alaska residency. She characterized equity crowd funding as "Alaskans for Alaska." Representative Pruitt asked how the division executed consumer education. Ms. Anslem replied that the division worked closely with the SEC who provided presentations and seminars as well as the American Association of Retired Persons (AARP) and acquired joint grants through the Investor Protection Trust to produce a series of 30 minute programs that were broadcast through KTOO TV on the 360 degree North Channel and reached 250,000 viewers per year. The division participated in all kinds of community events; small and large. 9:44:00 AM Representative Wilson wondered what had been the sticking point on the bill over the past six years to stall adoption. Ms. Anslem answered that the bill was complex and the rewrite made the issue appear "bigger" than it was. She noted that the ANCSA issue was intermixed with securities and had been a real impediment to updating the securities act because most of the securities act did not apply to ANCSA. She believed that separating the statutes would be beneficial to all parties. Representative Wilson surmised that the bill sounded good, but she did not know enough about it. Her biggest concern was related to administrative hearings versus court hearings. She was concerned about lowering the threshold for guilt. She asked whether the industry received notification and had a chance to weigh in on the bill. Ms. Anslem answered in the affirmative and pointed to the issue involving variable annuities. Co-Chair Thompson OPENED public testimony. Co-Chair Thompson CLOSED public testimony. Co-Chair Thompson understood the concerns of the committee based on the bill's large size. He noted that the bill had been well vetted by two other committees. He spoke to the fiscal notes and reported that two were zero and the other for the Department of Revenue was indeterminate but had a minimal impact. He communicated that the legislation protected consumers, vulnerable individuals, and provided for restitution among other benefits. He asked for discussion regarding reporting the bill out of committee due to the facts that only several days of session remained and CCED thought that the bill would be adopted by the Senate. 9:48:34 AM Representative Wilson appreciated the Co-Chair's comments and the consumer protection afforded in the bill. She understood that the bill had been vetted and she acknowledged that there was a companion bill in the other body. However, she wanted more time to answer her concerns regarding lowering the criminal threshold and to familiarize herself with all of the provisions in the bill. Representative Gattis requested more time to look at the bill in order to gain more clarity. Vice-Chair Saddler echoed the comments by the previous speakers and asked for more time to review the legislation. HB 194 was HEARD and HELD in committee for further consideration.