HB 170-AK SECURITIES ACT; PENALTIES; CRT. RULES  3:51:51 PM CHAIR KITO announced that the next order of business would be HOUSE BILL NO. 170, "An Act relating to securities, registration, exempt securities, exempt transactions, broker- dealers, agents, investment advice, investment advisers, investment adviser representatives, federal covered securities, federal covered investment advisers, viatical settlement interests, small intrastate security offerings, Canadian broker- dealers, and Canadian agents; relating to administrative, civil, and criminal enforcement provisions, including restitution and civil penalties for violations; relating to an investor training fund; establishing increased civil penalties for harming older persons and vulnerable adults; relating to corporations organized under the Alaska Native Claims Settlement Act; amending Rules 4, 5, 54, 65, and 90, Alaska Rules of Civil Procedure, and Rule 602, Alaska Rules of Appellate Procedure; and providing for an effective date." 3:52:33 PM KEVIN ANSELM, Director, Division of Banking & Securities, Department of Commerce, Community & Economic Development (DCCED), presented PowerPoint presentation "Alaska Securities Act, HB 170" and reminded the committee that she had spoken to the need to update the Alaska Securities Act in late January. While a portion of the presentation may be a bit redundant, she said she does not want to confuse anyone by leaving out any steps. 3:53:08 PM MS. ANSELM turned to slides 2-3, and explained the Securities Act provides the legal framework for offering and selling securities to Alaskans, including the registration of firms and sales persons, registration or filing of securities, and enforcement. Currently, the Securities Act also regulates the Alaska Native Claims Settlement Act (ANCSA) Corporation and shareholder proxy related provisions. Securities, she offered, is the largest of the division's 12 programs and includes registering and monitoring over 95,000 securities registered salespersons, over 1,000 firms which are mostly out-of-state. She referred to HB 170, [Sec. 45.56.900(32), page 103, lines 9- 31, and page 104, lines 1-8] and noted the definition of security was not changed, it includes a long list of investments including stocks, bonds, limited partnerships, investments in common enterprises, investment contracts, and viaticals. 3:54:33 PM MS. ANSELM turned to slide 4, and advised that HB 170 updates the Alaska Securities Act by adopting many of the most recent model act provisions while retaining the Alaska centric provisions. The bill proposes to lift the Alaska Securities Act out of the Native Claims Settlement Act, the ANCSA provisions, which would highlight the vast differences between the programs and allow ANCSA constituents a clear view of the applicable law. Also, she explained, the bill's new provisions are included to protect older and vulnerable Alaskans from financial exploitation and give those investment professionals who make those reports immunity from administrative and civil liability. MS. ANSELM pointed out that currently, there is no provision in the law regarding restitution, and the civil penalty is capped at $25,000. The bill asks the legislature to designate civil penalties funds toward consumer protection and education because currently there is no requirement for continuing education of industry professionals, and those provisions are included in HB 170. 3:56:02 PM MS. ANSELM turned to slide 5, and reiterated that ANCSA provisions remain unchanged under AS 45.55. The new statute would be located under AS 45.56, the references to exempt ANCSA securities transactions are also included in the new Act under AS 45.56.210, Sec. 27. MS. ANSELM turned to slide 6, pointed to the top four highlights in HB 170, and advised as follows: the bill eliminates filings for all Alaska-based exemptions from registration, except crowdfunding; updates entity and law references; includes "bad actor" disqualifiers (coughing) basically states that anyone with certain types of crimes such as dishonesty or theft cannot be licensed as an Alaska salesperson; and improves enforcement and investor protection and education provisions. 3:57:27 PM MS. ANSELM turned to slide 7, and explained the slide depicts the general articles of the Alaska Securities Act. The first 14 pages of the bill would change the statute number and other statutes that reference the Securities Act; and Secs. 15-24 repeal and modify statutes under AS 45.55 relating to the ANCSA Corporations and proxy solicitations. MS. ANSELM turned to slides 8-10, and reminded the committee that the division does take enforcement actions: in FY2016, it issued 36 final orders, and 17 of those orders were securities related. She explained most of the division's orders are posted online, and the division is in the process of making sure all of its orders are posted "back to the beginning of time." In calendar year 2016, the division issued 27 final orders, and 13 of those orders were securities related. MS. ANSELM turned to slide 9, and explained some of the scams and subsequent orders. Mr. Michael Scow took money from an Alaskan for his Arizona-based insurance firm, wherein an order for $25,000 was issued by the division, and Mr. Scow has not paid the Alaskan or the division. She advised that when she discussed the Fortune Oil and Gas scam during her testimony in January, at that time the division was awaiting a court order. She reminded the committee that people from Texas came to Alaska, sold Alaskans approximately $3.1 million worth of worthless limited partnerships. The division issued an order for the maximum amount possible of $25,000, the judge agreed and issued his order in March of 2016, granting $25,000 in civil penalty on losses of $3.1 million. She commented, "We're out of date." The SOS Disasterplan.com scam and the Troy Stafford and Patrick Williams scam were two different sorts of scams, wherein SOS Disasterplan.com had a website and issued approximately $540,000 in worthless securities, again, with the maximum civil penalty limit being $25,000. She related that it is the same with Troy Stafford and Patrick Williams, except their scam was a bit different because they were in Alaska and sold another Alaskan a business opportunity with an employment opportunity in a bogus Alaska company. Subsequent to the division speaking with the two men, the men agreed to rescind and return the money, except they did not return any money. She explained that there are provisions in the new HB 170 that would resolve some of those issues. 4:00:57 PM MS. ANSELM advised that the Global Arena Capital Corp. is a New York firm that found Mr. Burk, a retired halibut fisherman, on a call list, called him at home, and sold him junk bonds. This firm had advised Mr. Burk that he would make 16-18 percent, except he did not. The division was able to get his money back, but the maximum penalty was $25,000, she said. 4:01:40 PM MS. ANSELM presented oral testimony from Mr. Burk who had since passed, and noted that, ultimately, the case was settled. [Mr. Burk's oral testimony 4:01:40 through 4:03:41. See pages 13-15 of the PowerPoint presentation for written testimony.] 4:03:41 PM MS. ANSELM advised that the division took action against six individuals and was able to get Mr. Burk's money back because it found a salesperson with a conscience. Stronger tools are necessary in order to deal with bad actors and this type of fraudulent activity should make everyone in the state angry. She then described Mr. Burk as angry and smart because when he received another call from someone trying to sell him Bio- Technology stock, he called the division, and it was able to put another firm in a different state out of business and take away its license. As far as fines, she reiterated, that the maximum fine was $25,000, and the only way to hurt the firms that hurt Alaskans is usually in the pocketbook. She stressed that it is the division's hope the legislature help the division through enacting the new Alaska Securities Act, HB 170. 4:05:00 PM REPRESENTATIVE STUTES asked how the Alaska Native Claims Settlement Act (ANCSA) Corporations feel about the separation. MS. ANSELM responded that the corporations have advised they have no objection to separating the statutes. 4:05:27 PM REPRESENTATIVE KNOPP referred to the Troy Stafford and Patrick Williams scenario, and asked how it falls under securities. MS. ANSELM answered that the two men were selling the Alaskan stock in a company and the gentleman would become part owner; therefore, it was a common enterprise. She said that for a while he was not directly involved in that enterprise, but part of the fraud was that he would be a manager of the company. REPRESENTATIVE KNOPP referred to slide 4 and the last two bullet points, noting concern about the creation of an investor education fund, and asked why it is the role of state agencies to educate the public in investments. He referred to the last bullet point requiring continuing education, and asked whether it means the state is not providing the continuing education for investment advisors. He further asked whether there are investment advisors registered in Alaska who do not perform continuing education. 4:07:21 PM MS. ANSELM responded that as far as education, it is not required in Alaska currently, and there are a number of representatives that do not perform continuing education whether they are stock brokers or investment advisors. The division would like to be more synthesized with the rest of the nation, and the division would require the continuing education and not provide the continuing education. As to why the division would want to have investor education, she responded that it is part of the division's mission which read is to: Protect consumers of financial services and promote safe and sound financial systems. The division also supports the department's mission, which is to: Promote a healthy economy, support strong communities, and protect consumers in Alaska. MS. ANSELM explained that the division's mission is to protect consumers of financial services, and promote safe and sound financial systems. In supporting the department's mission, the department is promoting a healthy economy, supporting strong communities, and protecting consumers in Alaska. Therefore, she said, when protecting consumers, they must be given the tools to protect themselves, and the Investor Education Funds would be set up so approximately one-third of the civil penalties could be put into another account which would have consumer education on the account. However, she noted, it would be at the legislature's behest whether or not the funds would be spent on consumer education because the legislature controls the budget. Currently, consumer education is performed in partnership with other states and sometimes federal organizations. The Securities and Exchange Commission came to Alaska and performed joint outreach events with the division for the military, government workers, and the public. There have been joint- "scam-jams" with the Department of Justice, U.S. Attorney's Office, FBI, Better Business Bureau, and others to reach out to the public so it knows what is going on and can be forewarned and forearmed. She said that Alaska was able to use some investor protection funds from the Investor Protection Trust, which came from a settlement with some large stock brokerage firms in the 1990s. Those funds are almost depleted, and Alaska used those funds primarily to partner with AARP and perform a series of instructive television shows on 360 North. The instructive television shows were on various topics relating to seniors and everyone in the state in order to understand how to protect themselves when working with investments, knowing what they needed to know about social security and other issues affecting their livelihood. She said the division speaks in schools, speaks at civic organizations, and will do pretty much anything when it can advise people about how they can protect themselves and hold onto their hard-earned money. REPRESENTATIVE KNOPP acknowledged that Alaska's aging population are targets, and as the economy tightens up people get creative. 4:11:31 PM REPRESENTATIVE JOSEPHSON asked whether there was a draft of HB 170, or some type of reform in the [Twenty-Ninth Alaska State Legislature]. MS. ANSELM responded that within the [Twenty-Ninth Alaska State Legislature] House Bill 194 and Senate Bill 108 were similar to HB 170, there were a couple of additions, including the vulnerable adult provisions for reporting financial exploitation. 4:12:15 PM REPRESENTATIVE WOOL noted his surprise that the education programs are performed through the Department of Health and Social Services (DHSS) and asked Ms. Anselm to explain navigating through the healthcare system, but also through securities fraud. He asked whether the same people offer the training on health issues and securities fraud. MS. ANSELM explained that the new provision, protection for vulnerable and older Alaskans, read that if there is a suspicion of financial exploitation, a report is required to be filed with the division or Adult Protective Services. She deferred to the Division of Senior and Disabilities Services. 4:14:20 PM DEB ETHERIDGE, Deputy Director, Central Office, Division of Senior and Disabilities Services, Department of Health, and Social Services (DHSS), opined that Representative Wool was asking how the system responds to allegations of financial exploitation currently. REPRESENTATIVE WOOL said she was correct within the discussion of investor education and prevention of fraud. 4:15:23 PM MS. ETHERIDGE answered that the Division of Senior and Disability Services oversees the adult protection unit, and the authority and requirement in adult protection is to investigate all allegations of financial exploitation. She explained there are civil investigations, partnering with law enforcement if there is a crime, but the adult protection unit also receives reports of financial exploitation from a mandatory reporters or citizens, family members, or neighbors. In the event the person is deemed a vulnerable adult, through that reporting, the division performs investigations and makes findings, and also performs protective services. Oftentimes, she said, when the division receives these reports the money has already been spent and the division is actually cleaning up, and "this is an opportunity to receive the reports prior to." CHAIR KITO opened public testimony on HB 170. [HB 170 was held over.]