HOUSE LABOR AND COMMERCE STANDING COMMITTEE April 24, 1998 3:28 p.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative John Cowdery, Vice Chairman Representative Bill Hudson Representative Jerry Sanders Representative Joe Ryan MEMBERS ABSENT Representative Tom Brice Representative Gene Kubina COMMITTEE CALENDAR * HOUSE BILL NO. 389 "An Act relating to an exemption from the requirement for payment for overtime under a voluntary written agreement for certain employees in the airline industry; and providing for an effective date." - HEARD AND HELD * HOUSE BILL NO. 486 "An Act relating to the Alaska Securities Act; and providing for an effective date." - HEARD AND HELD CONFIRMATION HEARINGS: BOARDS AND COMMISSIONS - SCHEDULED BUT NOT HEARD HOUSE BILL NO. 477 "An Act relating to common interest communities; and amending Rule 72(k), Alaska Rules of Civil Procedure." - REMOVED FROM AGENDA * HOUSE BILL NO. 276 "An Act relating to the compensation and terms and conditions of employment of the heads and deputy heads of principal executive departments of the state." - REMOVED FROM AGENDA HOUSE BILL NO. 350 "An Act requiring that the cost of contraceptives and related health care services be included in health insurance coverage." - REMOVED FROM AGENDA (* First public hearing) PREVIOUS ACTION BILL: HB 389 SHORT TITLE: OVERTIME WAGE EXEMPTION AIRLINE EMPLOYEES SPONSOR(S): REPRESENTATIVES(S) COWDERY Jrn-Date Jrn-Page Action 02/11/98 2279 (H) READ THE FIRST TIME - REFERRAL(S) 02/11/98 2279 (H) LABOR & COMMERCE 04/22/98 (H) L&C AT 3:15 PM CAPITOL 17 04/22/98 (H) MINUTE(L&C) 04/24/98 (H) L&C AT 3:15 PM CAPITOL 17 BILL: HB 486 SHORT TITLE: ALASKA SECURITIES ACT SPONSOR(S): LABOR & COMMERCE BY REQUEST Jrn-Date Jrn-Page Action 04/16/98 3014 (H) READ THE FIRST TIME - REFERRAL(S) 04/16/98 3014 (H) LABOR & COMMERCE 04/24/98 (H) L&C AT 3:15 PM CAPITOL 17 WITNESS REGISTER DOUGLAS ORCUTT P.O. Box 198043 Anchorage, Alaska 99519 Telephone: (907) 561-0436 POSITION STATEMENT: Testified in support of HB 389, suggested additional language. MICHELLE BUCKMASTER P.O. Box 111306 Anchorage, Alaska 99511 Telephone: (907) 344-5878 POSITION STATEMENT: Testified in support of HB 389. DANIEL SMITH 7453 Tana Circle Anchorage, Alaska 99504 Telephone: (907) 333-1008 POSITION STATEMENT: Testified in support of HB 389. MICHAEL BROADWAY 3536 East 19th Avenue Anchorage, Alaska 99508 Telephone: (907) 258-5606 POSITION STATEMENT: Testified in support of HB 389. DAVID ATHEARN 4237 Marion Drive Juneau, Alaska 99801 Telephone: (907) 789-2331 POSITION STATEMENT: Testified in support of HB 389. CHRIS MONAGLE P.O. Box 34652 Juneau, Alaska 99803 Telephone: (907) 789-5674 POSITION STATEMENT: Testified in support of HB 389. MANO FREY, President Alaska State AFL-CIO 2501 Commercial Drive Anchorage, Alaska 99501 Telephone: (907) 272-4571 POSITION STATEMENT: Testified against HB 389. DWIGHT PERKINS, Special Assistant Office of the Commissioner Department of Labor P.O. Box 21149 Juneau, Alaska 99802-1149 Telephone: (907) 465-2700 POSITION STATEMENT: Testified on HB 389. FRANKLIN TERRY ELDER, Senior Securities Examiner Division of Banking, Securities and Corporations Department of Commerce and Economic Development P.O. Box 110807 Juneau, Alaska 99811-0807 Telephone: (907) 465-2521 POSITION STATEMENT: Testified in support of HB 486. VINCE USERA, Assistant Attorney General Commercial Section Civil Division Department of Law P.O. Box 110300 Juneau, Alaska 99811-0300 Telephone: (907) 465-3600 POSITION STATEMENT: Provided information on HB 389. ACTION NARRATIVE TAPE 98-50, SIDE A Number 0001 CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce Standing Committee meeting to order at 3:28 p.m. Members present at the call to order were Representatives Rokeberg, Cowdery, Hudson and Sanders. Representative Ryan arrived at 4:09 p.m. HB 389 - OVERTIME WAGE EXEMPTION AIRLINE EMPLOYEES Number 0101 CHAIRMAN ROKEBERG announced the committee's first order of business was HB 389, "An Act relating to an exemption from the requirement for payment for overtime under a voluntary written agreement for certain employees in the airline industry; and providing for an effective date." Number 0103 REPRESENTATIVE JOHN COWDERY presented HB 389 as the legislation's sponsor. He commented HB 389 was introduced at the request of an ad hoc group of employees from United Airlines, noting one of the employees was his neighbor. Representative Cowdery read the sponsor statement, making some additional comments and omitting the sentence, "However, we expect organized labor to oppose it." He noted the current overtime practice made it difficult or impossible for employees to trade shifts to have, for example, an extra day off during salmon season. He said he thought this had been done quite a lot in the past. Representative Cowdery stated he was sure organized labor would prefer the status quo, but he said they have indicated they will work with them on this bill and he indicated he hoped the legislation would find a way to provide a mechanism for the airline employees to legally trade shifts. Representative Cowdery mentioned he was not feeling completely well that day and Marco Pignalberi, a member of his staff, was present to answer questions on the legislation. The sponsor statement read: HB 389 was introduced at the request of an ad hoc group of employees from United Airlines. Since its introduction, support has broadened to include the entire commercial airline industry in Alaska. The Alaska Air Carriers Association, its individual constituent members and their employees are asking the legislature to pass this legislation. Management and employees support it. However, we expect organized labor to oppose it. HB 389 is intended to allow airline employees to trade workdays with each other without invoking overtime pay requirements. Under strict interpretation of current statute, a substitute employee who works a shift for another employee must be paid overtime if the substitute employee already worked 8 hours in the same work day or 40 hours in the same work week. Consequently, shift trading can only occur when the substitute employee has a day off from his/her regular shift. This situation narrows the available pool of substitute workers and makes it impossible or very difficult to trade shifts. Airline employees in Alaska are vexed under Alaska's statute (A.S. 23.10.160) because we are the only state in the U.S. that has a daily overtime requirement. This bill gives Alaskan employees of airlines the same treatment as their counterparts in the other 49 states. Shift trading among employees in the airline industry is a very common practice. Usually it is done informally with tacit approval of the employer. HB 389 will legitimize the practice that has become the custom in the industry. Without it, employer airlines would violate the law if they allow their employees to trade shifts. Organized Labor would prefer the status quo. They are against any weakening of the overtime pay requirements in statutes. There is no problem with the status quo as long as the Department of Labor doesn't enforce the overtime statutes. However, neither the legislature, nor the governor, should be party to any practice that condones arbitrary enforcement. Either we must tell the employees of the airline industry in Alaska that they can no longer trade shifts, or, we must provide a mechanism for them to do it legally. Number 0385 CHAIRMAN ROKEBERG stated the committee would take teleconference testimony and confirmed members of the audience wishing to testify on HB 389 had signed the witness register. He asked witnesses to limit their testimony to three minutes or less. Number 0443 DOUGLAS ORCUTT testified via teleconference from Anchorage. He stated he worked for Alaska Airlines and was the vice president for the International Association of Machinists and Aerospace Workers (IAM), representing Alaska Airlines employees out of District 143 in Seattle. Mr. Orcutt spoke from his prepared statement, "I've worked for Alaska Airlines for 23 years. I've enjoyed the ability to trade days and shifts off between the course of my employment both in Seattle and in Anchorage. (Indisc.--coughing) practice of trading days off or shifts by employees of Alaska Airlines have been in effect for over 30 years. Alaska Airlines, like other airlines in the industry, operates 24 hours a day 365 days a year. The voluntary day and shift trading among employees is a longstanding airline industry practice which allows an employee to obtain additional time off from work to address personal and professional needs which would otherwise be unavailable to them. These needs can range from time off not covered by a working agreement and the relative (indisc.) to the ability to spend quality time with family when work and school schedule conflict or to perform charitable work in the community and to obtain additional education." Number 0530 MR. ORCUTT continued, "The International Association of Machinists and Aerospace Workers, the IAM, currently represents the mechanic and related MRP [mechanic and ramp personnel] employees as well as the clerical office and passenger service (indisc.) [COPS] employees under separate contracts (indisc.) Alaska Airlines. ... I have been elected and currently serve as an IAM District 143 vice president for the union at Alaska Airlines and help administer and enforce both contracts throughout the Alaska system. Although the MRP agreement is silent, the practice of trading days off or shifts has always been allowed and does not, and was never intended to, jeopardize overtime rules or pay for that work group. Moreover, the current working agreement between Alaska Airlines and the IAM for the clerical office passenger service employees does have negotiated contract language under its article 5, hours and service, paragraph 'f,' page 14, which states, 'Employees in the same classification and work group may participate in the trade of days off or shift with their managers approval 48 hours in advance.' I emphasize, 'employees shall be compensated as if they remained on their original days off and shift. When employees trade days off or shifts, they will be considered for pay purposes to have remained in their scheduled days off and/or shifts.' The mechanical-related employee group is currently in contract negotiations with Alaska Airlines and with support from the carrier is seeking to adopt contract language identical to the COPS agreement." Number 0622 MR. ORCUTT stated, "I have reviewed HB 389 and would offer only the following suggestion. The Act should include further language under paragraph 'd' which would clarify when employees trade days off or shifts that they will be considered for pay purposes to have remained in their scheduled days off or shifts, as it is described in the COPS working agreement which I have read. As an employee and a union representative of Alaska Airlines, I certainly support HB 389 because it maximizes schedule flexibility for employees while minimizing administrative scheduling for management, and provides a positive voluntary benefit to all employees." Mr. Orcutt indicated anyone who wanted further information on the union's position on the legislation could phone either him or Tom Gibbs (ph), the general chairman of Air Transport District 143, Seattle, Washington, 1-800-248-0143. Number 0727 REPRESENTATIVE BILL HUDSON asked Mr. Orcutt if it was correct this had been a practice for 30 years. Number 0730 MR. ORCUTT replied in the affirmative. He indicated Mr. Gibbs (ph) had said the practice for at least 30 years and probably longer. Mr. Orcutt noted Alaska Airlines has had a contract with the IAM since 1958. Number 0744 REPRESENTATIVE HUDSON asked why it needed to be changed if it had been working for 30 years. Number 0749 MR. ORCUTT indicated the process might need to be legitimized in the state of Alaska. Number 0762 REPRESENTATIVE COWDERY stated, "As I understand, even though it's been in existence it ... could lead to the employer facing a lawsuit - a class action lawsuit or something for -- or that time, some sort of a legal problem if ... they endorse this as ... it stands now." He asked if he was correct. Number 0787 MR. ORCUTT replied, "Yes, I think I'm in - in agreement with that although there's never been any times for many employees on ... Alaska Airlines." Mr. Orcutt said he had spoken with Mr. Perkins, of the Department of Labor (DOL) the other day who had indicated the department had never received any complaints from Alaska Airlines. Number 0806 REPRESENTATIVE COWDERY said, "I understand, but that's not to say some ambitious lawyer could come around and offer some employees money (indisc.) enter into a suit ..." MR. ORCUTT indicated he was not saying that could not happen and stated he was in favor of the bill. Number 0825 CHAIRMAN ROKEBERG asked Mr. Orcutt if he had had any communications with the AFL-CIO (American Federation of Labor - Congress of Industrial Organizations) or the International Brotherhood of Teamsters. MR. ORCUTT replied he had not. CHAIRMAN ROKEBERG recommended he do so and try to get those organizations behind his union. The chairman stated, "It's been our experience that the organized labor takes a jaundiced eye at amending this particular provision of the statute, so I recommend that you get those chaps on your side where they belong as a pro- worker group." Number 0885 MICHELLE BUCKMASTER testified next via teleconference from Anchorage. She stated she had worked for United Airlines for ten years and noted she was a customer service representative for the airline in Anchorage. She commented she had faxed several pages of text to the committee the day before, including a revised copy of HB 389 and a copy of a similar bill passed recently in the state of Washington. Ms. Buckmaster stated, "In May 1997 United Airlines informed (indisc.) employees in Alaska that because of the state labor laws in our state, the trade policy and company regulations would no longer pertain to us. This trade policy is a significant benefit to us as employees as well as all airline employees in Alaska. ... In an industry that spends 24 hour a day, 7 days a week, 52 weeks a year in promoting and supporting the economic growth of our state through tourism, conventions, sporting events and numerous other activities, the trade policy is a valuable benefit and tool to its employees who would otherwise miss out on precious time with family, observance of religious holidays, educational opportunities, summer vacations and extra time for those who require it. In an industry where competition is always a priority, we have come together to make a change that will benefit and create a win-win situation for all airline employees. Over the past year, employees from ... several air carriers have worked together to encourage the implementation of this bill. As you are aware from the numerous phone calls and letters from concerned airline employees, there has been a great deal of grass root support for this legislation. In closing, we understand and respect the labor are here to protect us, however this particular law which may be a protection in your eyes (indisc.) eliminating a benefit in ours. Therefore I'm here on behalf of these employees to request the amendment we have brought before you not only be passed but be passed in a timely manner so that this valuable benefit may be reimplemented as soon as possible." Number 1020 REPRESENTATIVE COWDERY said Ms. Buckmaster had been the first person to bring this problem to his attention and had done a lot of work on it. He indicated she had gathered signatures from other employees with similar concerns. Number 1033 CHAIRMAN ROKEBERG indicated he had worked as a passenger service agent for Northwest Airlines at the Anchorage International Airport 34 years ago and 31 years ago for Alaska Airlines. He said the practice of trading days off and shifts existed at that time [tape states "34 years" and "Alaska Airlines," Chairman Rokeberg corrected information in further testimony]. Number 1065 DANIEL SMITH testified next via teleconference from Anchorage. He stated he was an employee with United Airlines in Alaska and would just like to reiterate the comments of Mr. Orcutt and Ms. Buckmaster. He said the trade policy was an important tool to assist the employees, and as previously mentioned, it was almost an industry standard. Mr. Smith indicated Alaska was the only area where they were having problems with this policy. Number 1113 MICHAEL BROADWAY testified next via teleconference from Anchorage. He stated he worked for United Airlines and was there to show his support for what the people before him had basically said. He indicated the trading policy was an airline industry standard; it made a more friendly work environment, creating better jobs. Number 1188 DAVID ATHEARN came forward to testify in Juneau. He stated he was an Alaska Airlines employee and indicated he had been employed with Alaska Airlines in Juneau for 22 years. He stated his airline career extended back 35 years, noting the trade had been in effect back in the "dark ages" of the industry as well. Mr. Athearn said it had, if anything, become more of an integral part of the business among the employee groups. He stated, "On a daily basis in my work group there's probably 30 employees on the various shifts throughout the 24 hour time period and about that number in the COPS group, I being in the MRP, mechanic and related, and the COPS, they're the ones at the ticket counter, the freight office and what have you. ... I individually maintain a trade book to keep track ... and there is anywhere from five to ten or a dozen daily people that are very dependent upon a good, viable day trade policy to have time off available for a variety of reasons - vacation, personal time, et cetera. This is such an ingrained part of ... the way we do business out at Alaska Airlines that there's no way that I can conceive that we could operate unless we had the policy like this in effect." He indicated he had a question about the accountability of time which would be brought up by Mr. Monagle and commented their appearance to testify had been on very short notice. Mr. Athearn spoke in support of the legislation's passage and commented it needed to be "cut in stone." He indicated the language did not exist in the MRP contract but as Mr. Orcutt had mentioned, the other half of their work group did have that language. Number 1338 REPRESENTATIVE COWDERY asked what the normal practice was for trading days off, questioning whether it was done just between individuals or if they worked through management. Number 1348 MR. ATHEARN noted there was what they call a lead ramp service or lead passenger service as management's representative for these purposes. He said, "The person desiring a trade initiates the paperwork between themselves with the approval ... of whoever happens to be the straw boss of their work group that day, and then it's entered into a trade log so when shifts change the new lead coming on duty can just simply look at the piece of paper and say, 'Joe for Sam on such and such a shift,' and know who's going to be there." Number 1383 REPRESENTATIVE COWDERY asked what happened if one person fulfilled his or her part of a trade agreement but the counterpart did not. He asked, "Are you looking upon the management to do that -- to step in and pay you for that?" Number 1397 MR. ATHEARN said, "Then that becomes a -- if you've held up your end of the bargain and someone, the person that had agreed to trade with you did not show up, you're not going to be held accountable for that because you had a viable trade established with them. If the other person spaced out or called in sick or whatever, ... you're not held responsible for that. It would be considered ... unauthorized leave of absence or (indisc.)." Number 1423 REPRESENTATIVE COWDERY confirmed that if an employee made a trade it did not show up in his or paycheck, it was just in the operation records. Number 1427 MR. ATHEARN replied there was record made of it, noting there was a provision on their timecards. He said, "You circle the day, say you took Tuesday, and it says, 'Trade day worked,' you would circle that, or 'Trade day off,' you would circle that." Number 1443 REPRESENTATIVE COWDERY confirmed the practice was so common the timecards were printed to indicate that possibility. Number 1452 MR. ATHEARN agreed, stating it was an innovation which came eight to ten years ago for accountability purposes. Number 1463 REPRESENTATIVE HUDSON commented the committee had heard United Airlines had essentially put its employees on notice the airline was not continuing this practice because of the law. He asked Mr. Athearn if Alaska Airlines had notified him the airline would not continue the current trade practice. MR. ATHEARN answered in the negative. He said, "They're pretty much on the same page with us on this I think." Number 1498 CHRIS MONAGLE came forward to testify next. He stated, "I (indisc.) past president here the last five years ... of Local 2263 which is the local that covers all of Southeast [Southeast Alaska] for Alaska Airlines, the ramp maintenance divisions. I think that what we're looking for here is protection ... for things [to] remain the same. The United [United Airlines] situation has ... certainly given us a scare, taking away our trade benefits." Mr. Monagle said people relied on trades benefits on a daily basis, giving the example of how he used the trade practice to be able to coach Little League Baseball without having Saturdays off. He said he usually gave his days to returning college kids and he noted it was common for people to use trades for an extra weekend day in the summertime to go fishing. Mr. Monagle indicated the work group at Alaska Airlines in Juneau felt very strongly about the issue. He passed around a timecard for the committee members to see, indicating the practice was so common it was on the timecard for every employee. He added, "I wanted to say that when we do trade, it's always at a regular straight-time rate, there's never ... any advantage to stockpile overtime or to violate any state laws regarding the use of, or accumulation of, overtime. ... I see it as nothing but a benefit and would strongly favor the bill." Number 1599 REPRESENTATIVE COWDERY said to Mr. Monagle, "You say ... it's a common thing, but on the same token, your airline hasn't sent notice, but we had -- I think I had communication with ... Alaska Airline, well with the airline industry as a whole. They felt -- the management felt that if we didn't -- something similar to this bill happen, that it could be selectively enforced to -- and - and that was their concern. It wasn't that they -- the airline industry as you said, and this testimony showed, that they're all in favor of this, they just want to have it so they don't get something stacked up on 'em and then they have to defend it." MR. MONAGLE said he would agree. Number 1642 CHAIRMAN ROKEBERG commented Alaska Airlines was the largest carrier in Juneau but he noted there were other small commuter-type air taxis and other scheduled carriers. He asked if those people were members of any unions or generally nonunion. MR. MONAGLE answered he thought most of the small carriers were nonunion. Number 1660 CHAIRMAN ROKEBERG asked, "How many people (indisc.) you think work on the ramps and as passenger service agents or would be covered under this bill with your firm working those same capacities for all the other kind of carriers in 'Anchorage' that are not union members?" [Note: "Anchorage" stated on tape, although it appeared the question was in reference to Juneau.] Number 1680 MR. MONAGLE confirmed Chairman Rokeberg was referring to people working for the other carriers. CHAIRMAN ROKEBERG indicated he was looking for a rough estimate. MR. MONAGLE with an aside to Mr. Athearn, indicated the number in Juneau would be probably less than 40 total. He said he was not sure how many people Wings of Alaska employed, noting it was probably the largest other carrier in Juneau. CHAIRMAN ROKEBERG asked if that estimate included the pilots. MR. MONAGLE answered in the affirmative. Number 1738 MANO FREY, President, Alaska State AFL-CIO, testified next via teleconference from Anchorage. Mr. Frey said he sincerely appreciated the comments and questions, noting, "You have, I believe, become enlightened about some of our concerns and issues regarding overtime and wage and hour laws, and I appreciate you and your committee members concern. As you know, we're ... very reluctant when there are efforts to change the wage and hour laws." Mr. Frey commented they have had many opportunities through the last two legislative sessions to discuss with the chairman and the committee members the AFL-CIO's concern about downgrading Alaska's strong overtime and wage and hour laws. Mr. Frey indicated the AFL-CIO thinks those strong laws are good, and not a negative. He noted, "I think it's good for the workers of this state to know that ... if they work overtime they're going to get paid overtime, and, generally, it amounts to employers scheduling those employees off rather than pay the overtime which really was originally the ... very intent of having overtime -- is to allow people more time with their families and to do things ... that they'd rather do than necessarily be working, even at an overtime rate. Having said that, I take very seriously your questions with regards to Doug's [Mr. Orcutt] testimony. We have not spoken about this until just prior to the hearing and it is very rare that the state AFL-CIO is in opposition to the bill supported strongly by one of its affiliates, but that is the case today. We do oppose the bill. But let me assure you that we will, when we push the button and listen today to the rest of the testimony, the machinists' union and the AFL-CIO will schedule a meeting to sit down and discuss this, see if there are ways that would provide some reassurances that - that we might feel necessary and if we can make the bill palatable we would change our position ... we'll try to set up a meeting as quickly as we can, depending on our schedules. ... We will try to schedule a meeting so that we can see if there's not a way to ... reach a middle ground on this, because it is a very uncomfortable position ...." He indicated he agreed with Representative Cowdery that a "rascal" attorney could cause some legal problems with the current situation, noting he would do almost anything to try to prevent that. Number 1936 REPRESENTATIVE COWDERY said it wasn't his intention or he thought the intention of the employees requesting the legislation to do any downgrading of organized labor, but he commented it was something they had to work out someway. He indicated he would be glad to work with Mr. Frey to avoid some sort of selective enforcement or a future class action lawsuit. Number 1925 MR. FREY said he agreed with that and reiterated that they would try to set up a meeting with the machinists' group. He indicated they would attempt to reach something the AFL-CIO could support. Number 1945 CHAIRMAN ROKEBERG indirectly asked Mr. Frey if he was serious about meeting with the machinists before the end of the legislative session on May 12. MR. FREY. indicated he was serious about the meeting. Number 1960 CHAIRMAN ROKEBERG stated, "As my constituent, I would not want to do anything to ruffle your feathers but I think this is an excellent piece of legislation and ... I am very familiar with this situation from my own personal experience. ... This is a longstanding traditional practice and it's so pro-worker I would not even want to have ... any idea that you ... as a chief representative of organized labor in this state would stand in the way ... of workers of this state. I mean I just cannot conceive of that, I mean it's beyond my understanding." Number 1996 MR. FREY humorously commented to Chairman Rokeberg he was curious why the chairman had downgraded himself by leaving the airline industry represented by a good strong union to go into the real estate business. He commented, "I can't believe it." CHAIRMAN ROKEBERG discussed his employment history briefly, noting he had worked for the airlines after college and the army. He said he took a leave of absence from Alaska Airlines and opened his first business, "The Birdhouse," commenting he never went back to Alaska Airlines. He said he eventually sold "The Birdhouse" and went back to college. Number 2023 REPRESENTATIVE HUDSON declared a conflict of interest, noting his son was a commercial pilot in Anchorage and his son's wife, his daughter-in-law, was a flight attendant. Number 2048 REPRESENTATIVE COWDERY asked Mr. Frey if he could come up with a "date certain" for Mr. Frey's recommendation on this. MR. FREY indicated he and Mr. Orcutt would meet the afternoon of Monday, April 27, 1998. He stated he would contact the committee as early as possible, either late Monday or early Tuesday. Number 2064 CHAIRMAN ROKEBERG said the committee would look kindly upon Mr. Frey's recommendation to the department not to try to enforce this or anything else until it was resolved. MR. FREY replied he absolutely would go on record supporting that. He said they would not want to see any kind of conflict rise up on the situation. CHAIRMAN ROKEBERG asked him if he would make the "other step" and put that into writing to United Airlines. MR. FREY answered in the affirmative, asking to whom he should address that. CHAIRMAN ROKEBERG recommended he ask Ms. Buckmaster if she was still at the Anchorage Legislative Information Office (LIO). Number 2095 DWIGHT PERKINS, Special Assistant, Office of the Commissioner, Department of Labor, came forward to testify. Mr. Perkins noted he had had some discussion recently with the IAM's representative, Mr. Orcutt. Mr. Perkins said in response to the sponsor's statement regarding the other 49 states, he said he believed, in all due respect to the sponsor, the research on that was slightly incorrect. Mr. Perkins commented he had recently received a notice from the state of Hawaii that similar legislation was going through there. He said the state of Washington had adopted similar legislation the past year. Mr. Perkins indicated he was not sure how many states had similar legislation but he knew Alaska was not the only state that did not allow this. He indicated he didn't necessarily disagree with the legislation's intent but was just clearing the record. Mr. Perkins commented United Airlines was pushing the legislation in Hawaii, stating, "And based on testimony that was made by a couple of United Airlines employees, I'm sorry that it sounds to me like the employer is getting this whipped up to a frenzy ... threatening the employees, 'If you don't take care of it, we're not gonna do it,' and - and that's what it sounds like, and I have a little concern with that ... if that's the case." REPRESENTATIVE COWDERY indicated he strongly did not feel that was the case. Mr. Perkins noted the employees had been put on notice the practice would no longer be allowed if this legislation was not passed. He said everyone had been on record and he would also go on record saying it has been a past practice for many years. He indicated the department did not have the finances to "go out and look for trouble in this type of area." He stated "Mr. Orcutt did tell me that in the 20-some years ... he's worked for Alaska Airlines, there's been one or two people, employees, that have come and asked them about this. After they explain it to them and how it's worked, ... their opposition was withdrawn. Representative Cowdery, you make a very good point as ... Mr. Frey said, there are some ... not over-zealous, but ... out of employed attorneys, maybe, that would like to ... make some money on this, and there certainly is a concern there, and I would agree with you, Representative Cowdery ... The department is in the process of - of trying to reach out. We did, with Mr. Gibbs (ph) down in Seattle, he got me in touch with Orcutt. I've talked to a couple friends that work for Alaska Airlines out here, I understand the concern, I've addressed the concern to the commissioner; he does want to work this out. There is language that does touch on, and Mr. Orcutt and I believe maybe the representatives from Alaska Airlines, we want to make sure that ... and it's in federal statute, to make sure ... that they aren't, for lack of other words, cheated out of their overtime pay when it's due them. (Indisc.--coughing) other (indisc.), and I only know of Alaska Airlines because I live here in Juneau and they've been a good ... employer to the employees of Alaska Airlines here. They have a good track record ... with their employees. I ... personally have several friends that work for Alaska Airlines that ... talk very highly of that particular company." Mr. Perkins stated, however, he would like to have the parties work together, indicating Mr. Frey and Mr. Orcutt would be meeting on April 27. Mr. Perkins indicated he had received some legislation from the state of Washington the previous day which he would examine and compare to the bill's language. He said, "It might be so that it is clear in other states that we use some language that ... would fit this and maybe offer a substitute to the ... legislation. But at this point, ... I'd like to just say give us a few days to let us work the constituent groups, to let us work with the air carriers associations and try to come back in a timely manner and get this taken care of." Number 2328 CHAIRMAN ROKEBERG said Mr. Perkins's comment about United Airlines was a bit injudicious. He indicated it was the chairman's reading that the airline was trying to abide by the law the DOL was mandated to enforce. MR. PERKINS apologized for any misunderstanding he might have presented. He stated, "It kind of bothered me that -- ... it sounded to me like there ... may be undue pressure put onto the employees for legislation ... that would cause a hardship for 'em ... and quite rightly give them some stress in their workplace." Mr. Perkins apologized if he misinterpreted or misspoke or offended anyone from United Airlines. Number 2378 CHAIRMAN ROKEBERG asked if there was anything in the statutes the DOL was in charge of enforcing that would allow for this type of shift trading. Number 2385 MR. PERKINS answered there was nothing under current statute. CHAIRMAN ROKEBERG noted the people interested in the legislation had identified a defect in Alaska's statutory construction and that was the problem. Number 2394 REPRESENTATIVE COWDERY indicated other carriers besides United Airlines were involved, noting PenAir, the Alaska Air Carriers Association and others had endorsed the legislation. He stated he hoped Mr. Perkins thought it was a good bill and they could work it out. He indicated the issue needed to be resolved. Number 2422 MR. PERKINS said he believed the legislation had merit and it was truly the employees coming forward wanting this done in light of what one of the air carriers saw as a deficiency in Alaska's statutes regarding wage and overtime laws. Mr. Perkins indicated it was something they needed to resolve. He noted the commissioner appreciated the opportunity to work with the Alaska Air Carriers Association, with the constituent groups, the employees and with the AFL-CIO, trying address this concern in a timely manner. Number 2448 CHAIRMAN ROKEBERG stated, "Mr. Perkins ... I'm sure that the commissioner wouldn't want to make himself open to the accusation that he was ... not for the working man of the state. ... I'm sure that ... the commissioner would not take kindly to that kind of a charge if it was ... leveled against him under these circumstances, I would think." MR. PERKINS asked, "What leveled against the commissioner?" CHAIRMAN ROKEBERG replied, "That he didn't support ..." [TESTIMONY INTERRUPTED BY AUTOMATIC TAPE CHANGE] TAPE 98-50, SIDE B Number 0001 MR. PERKINS stated, "... (indisc.) I said, I believe I said, was, I would like -- I believe he would like to have the opportunity to work with the groups ... to try to come to a resolution so that it can be moved forward. I think ... there is some potential, and Mr. Orcutt addressed it, in the proposed legislation, there is some potential for abuse, and we'd like to address that with some possibility of some language ... that is being used around the country that may make it simpler and address ... Mr. Orcutt's concern about the overtime provisions." Number 0023 CHAIRMAN ROKEBERG stated, "No, it wasn't what you said, it's what I said." Number 0027 REPRESENTATIVE HUDSON indicated he thought the department needed to examine this in a general sense. He mentioned he had brought the problem of his wife's hairdresser to Mr. Perkins, and commented, "But at any rate, you know, we really got into this before, and I can see it here and again, and I would really urge the department to try to look at this in a more general sense, because there has to be other sort of general applications like this that doesn't totally blow away or violate, you know, the working man's right to overtime pay when it's due and payable. So I would just urge you to take a look at that and see if there isn't some way ...." Number 0064 MR. PERKINS thanked Representative Hudson and said he would carry the message to the commissioner. Number 0070 REPRESENTATIVE COWDERY said he had been just told the federal government exempted airline employees from this, asking if Mr. Perkins was aware. Number 0089 MR. PERKINS replied it was to some degree but not across the board. He stated, "And that's something that I have ... and actually it's ... under the ... railway Act, and I believe it's US Code 181, and so we are looking at that, and that is what I was referring to as tying into this legislation." REPRESENTATIVE COWDERY said he would provide Mr. Perkins a copy of the statute they had. CHAIRMAN ROKEBERG stated, "Mr. Perkins, I would suggest that you do this very expeditiously or we'll remove the reference to airline business in this thing and move the bill." MR. PERKINS laughed and mentioned "fast track." He replied he would contact Mr. Frey and Mr. Orcutt, commenting they might possibly even have a teleconference over the weekend. Number 0115 CHAIRMAN ROKEBERG indicated the commissioner should be informed as well. He stated HB 389 would be held over. Number 0119 CHAIRMAN ROKEBERG called a brief at ease at 4:19 p.m. The committee came back to order at 4:21 p.m. HB 486 - ALASKA SECURITIES ACT Number 0154 CHAIRMAN ROKEBERG announced the committee's next order of business was HB 486, "An Act relating to the Alaska Securities Act; and providing for an effective date." Number 0170 FRANKLIN TERRY ELDER, Senior Securities Examiner; Division of Banking, Securities and Corporations; Department of Commerce and Economic Development (DCED), came forward to testify in support of HB 486 which he called an Act to amend the Alaska securities Act. He thanked the committee for its willingness to introduce this important piece of legislation which the department believes helps preserve significant state revenues while improving investor protection and providing new, easier access to capital markets for Alaska businesses. He indicated the questions might be asked, "Why are we amending the securities Act and why is the bill so long?" He said they were amending the securities Act for a number of reasons. Congress passed the National Securities Markets Improvement Act (NSMIA) in 1996, which created a new class of securities called "federal covered securities" and a new type of investment advisers called "federal covered advisers." He said NSMIA preempts states from requiring registration and collecting registration fees for these securities and advisers. However, in order to be revenue neutral, roughly, it allows states to amend their statutes and regulations to require notice filings and notice fees, which is what HB 486 does. Alaska currently receives annual revenues from these sources in excess of $4 million and these revenues have been growing at an approximately 14 percent rate over the last few years. At that rate, the revenues from these sources would roughly double in five years. Mr. Elder stated, "To preserve our revenues, we must amend our Act to include these new types of securities and investment advisers, and to provide for notice filings and notice fees. We must also amend our Act to preserve the authority NSMIA gives to the states to continue to provide assistance to Alaska investors who complain about abusive sales practices by their investment advisers. If we do not amend our Act, the general fund loses this revenue and we lose the authority to enforce the anti-fraud provisions of the securities Act with respect to federal covered advisers and their representatives." Number 0265 CHAIRMAN ROKEBERG asked, "Who are those (indisc.) people? Are they investment banking account executives ... 'cause they are federally licensed but you can also regulate them here in the state ...? MR. ELDER replied that they are large investment advising firms who, with NSMIA, only register with the Securities and Exchange Commission (SEC). In the past these large firms registered with both the SEC and the states. He said, "However, in NSMIA [it] said that we can continue to require that they pay notice fees here and we can continue to enforce the anti-fraud provisions of our Act. So, the SEC sees the states as the cop on the beat 'cause we're closer to the investors. ... If we don't do this, we don't have the authority to help investors. We basically would have to tell 'em to call the SEC if they have a problem." CHAIRMAN ROKEBERG asked if there was a threshold size for large. MR. ELDER replied $25 million under management, roughly. He noted it was more complicated than that but that was essentially the threshold. He said that anything with $25 million or more under assets is a "federal covered advisory (indisc.)." CHAIRMAN ROKEBERG said, "A large local investment adviser like McKinley Capital Management [McKinley Capital Management, Incorporated] in Anchorage ..." MR. ELDER said, "That's federal ..." CHAIRMAN ROKEBERG continued, "... SEC, but then what relations or what ..." Number 0322 MR. ELDER stated that McKinley Capital Management, Incorporated, is large enough; it will be a federal covered adviser, and therefore it is registered with the SEC. CHAIRMAN ROKEBERG asked what Mr. Elder's department had to do with that company, for example. MR. ELDER answered, "Nothing, except for enforcing anti-fraud provisions. So, if they commit fraud, ... we could go after 'em. We don't anticipate that of course, but ... that's what we could do." CHAIRMAN ROKEBERG asked about registered securities dealers and so forth. MR. ELDER replied that broker-dealers are not affected in that way. They still register broker-dealers and still have similar authority over broker-dealer to what they had before. CHAIRMAN ROKEBERG asked, "Without regard to capital size or anything?" MR. ELDER said that was correct. CHAIRMAN ROKEBERG indicated that could go from a one-man shop to Merrill Lynch and Company, Incorporated. MR. ELDER answered that was correct. He indicated NSMIA does affect some areas regarding broker-dealers, noting the department could no longer, for example, require different capital requirements, or books and records requirements for broker dealers than required by the SEC. Mr. Elder said there was no change in terms of the general regulation of broker-dealers. Number 0373 MR. ELDER continued, "The next question is, 'Why is the bill so long?' First, NSMIA is the most significant change to federal securities laws in the last 50 years. It affects not only securities regulations by creating federal covered securities but - but makes changes to the regulation of broker-dealers and especially to the regulation of investment advisers. This means that a lot of sections of our statute have to be changed to conform to the new regulatory regime. Our current statutes do not include notice filings and fees. They don't include federal covered securities, federal covered advisers, investment adviser representatives, state investment advisers - the smaller ones that are no longer subject to SEC regulations at all but only to those of the states, or prohibitions against specific unethical and fraudulent business practices, especially for investment advisers, which NSMIA provided was the proper domain for the states to enforce. So, we have to make changes to accommodate all of those ... in our Act. All of these require numerous changes and additions to the securities Act resulting in a long bill. Most of the language of these changes ... in this bill was drafted by the North American Securities Administrators Association (NASAA) ... I call it the NASAA that doesn't go to the moon. ... It's an organization of securities administrators of which we - we belong, in all the 50 states including Puerto Rico and D.C. [Washington, D.C.], also provinces of Canada and - and Mexico. We also worked with industry and we have received and given you in your packets copies of letters endorsing this legislation from the Investment Company Institute and the Investment Council Association of America (ph), both associations that represent the major players that are affected by this legislation, mutual funds and investment counselors." CHAIRMAN ROKEBERG asked if he had had a chance to circulate this among the people in the state who would be impacted. Number 0466 MR. ELDER answered in the affirmative. He stated, "We provided drafts of our proposed changes to persons who requested them, mostly attorneys who are practicing in the field. We also participated in a continuing legal education seminar in October of '97 in Anchorage with the Alaska Bar Association, and we provided the bar association copies of a draft of the changes and solicited ... comments .... In addition to the changes required by NSMIA, we are proposing new or updated language to other sections of the securities Act, sometimes to modernize language, and sometimes to improve access to capital markets for Alaska businesses." He said he would give a few examples, stating, "There's a new exemption from registration that's added for businesses that are seeking capital but limiting their search to a select category of wealthy investors and institutions called accredited investors. It's called the accredited investor exemption. This will allow Alaska businesses to participate in new methods of raising capital such as ACE-Net, that's the Angel Capital Electronic Network, which was a creation of the Small Business Administration. There's a new exemption added for businesses making their initial issuance of shares to the people forming the business and not to the general public. Some small businesses form and never intend to sell shares to the public. This exemption will remove the requirement for those people to file a request for exemption with the state. There's a new exemption added for the sellers of a business who transfer stock to the buyers of the business when ... the transfer is solely incidental to the sale of that business. That'll remove the potential liability that exists today when a small business owner sells his business to someone and neglects, when he transfers that stock because he had incorporated, ... to either file a registration or exemption with - with the state. Next, there's a new reciprocal limited registration created for Canadian broker- dealers to provide service to their existing clients who happen to be in Alaska for whatever reason, without having to be subject to the full examination and registration requirements of the Act. They are subject to the anti-fraud provisions of the Act. They cannot compete for new customers, but only service their existing Canadian customers who are in Alaska." Number 0575 MR. ELDER continued, "It is reciprocal in that for a Canadian broker-dealer to be able to do this, that Canadian province must allow the same for a US [United States] broker-dealer. These are probably the largest changes to the Act, so, in the interests of the committee's time, I won't go ... into the other changes, but will refer you to the comments that we have provided on sections of the bill, both for all the sections and specifically for the non- NSMIA sections ...." He noted he would be happy to answer any questions after he finished his presentation, but commented there were some corrects to the current draft of HB 486. He stated the division worked with legislative counsel in drafting the bill, and appreciated counsel's hard and careful work, but he said there had not been an opportunity for the division to proofread the bill before it was introduced. He referred to a letter from himself to the the chairman, dated April 16, 1998, containing the needed 13 changes in amendment form. He stated, "The first 10 changes ... that are numbered are replacements for sections as they exist in the current draft of the bill, so it'd be simply a matter of replacing the current sections with ... those that are in - in the letter .... Change number 11 in the letter is a new paragraph which is added to the definition of investment adviser. This is a paragraph that I had discussed verbally with legislative counsel, and we had agreed ... to insert it but somehow it got left out. This is the only correction that would add a new paragraph to the bill, and it would be on page 63. If adding a new paragraph to the bill would cause a logistical problem in - in moving the bill, then we can do without it, but ... if that wouldn't cause a problem then - then this would be useful. The last two changes in the letter are changes to the dates. ... When I was speaking with legislative counsel they told me they were going to put in a November 1, 1998, effective date, and I noticed that it's November 1, 1999, which unfortunately would cause us to lose our authority to collect notice fees ... and require notices." Number 0750 CHAIRMAN ROKEBERG asked if there was anything in there that would preclude the department from drafting regulations prior to their effective dates, noting the committee had gone through this with another bill that year. He said the committee was concerned because the effective date in certain sections was "out some time," that without those sections being adopted, they didn't have authority to do the "regs" until that effective date. MR. ELDER stated, "My reading of this allows us to go out and - and draft the regulations, but they wouldn't take effect until November 1, 1999." CHAIRMAN ROKEBERG confirmed the authority was in specific language in the bill. MR. ELDER agreed, stating, "In the last page ... of the bill it has -- Section 78, it says notwithstanding Section 82, the Department of Commerce may immediately proceed to adopt regulations necessary to implement the changes in the regulations take effect but not before November 1, 1999. And so we - we could do that ... I'm simply saying that that would be too late because the ..." CHAIRMAN ROKEBERG noted the committee had gone into that before, particularly on similar large things where there were prospective future dates. Number 0820 MR. ELDER indicated he suspected, based on his communication with legislative counsel who had said, November 1, 1998, that this had been a mistake. REPRESENTATIVE HUDSON commented, because of his extreme confidence in Willis Kirkpatrick [Director, Division of Banking, Securities and Corporations] and Mr. Elder, he would like to consider the suggested amendments 1 through 10 in Mr. Elder's letter as Amendment 1. CHAIRMAN ROKEBERG commented that was not a problem. Amendment 1 (taken from Mr. Elder's April 16, 1998, letter) read: 1. (Section 1, page 2, line 14) Replace current AS 14.43.148(h)(1)(A)(xiii) with the following: (xiii) registration as a broker-dealer, an agent, a state [OR] investment adviser, or an investment adviser representative under AS 45.55.030; 2. (Section 2, page 3, line 24) Replace current AS 25.27.244(s)(2)(A)(xii) with the following: (xii) registration as a broker-dealer, an agent, a state [OR] investment adviser, or an investment adviser representative under AS 45.55.030; 3. (Section 3, page 5, line 5) Replace current AS 25.27.244(s)(2)(A)(xii) with the following: (xii) registration as a broker-dealer, an agent, a state [OR] investment adviser, or an investment adviser representative under AS 45.55.030; 4. (Section 4, page 5, line 30) Replace current AS 37.23.050(a)(2) with the following: (2) a state [AN] investment adviser registered under AS 45.55.030 [AND UNDER 15 U.S.C. 80b-3 (INVESTMENT ADVISERS ACT OF 1940)] or a federal covered adviser that has made a notice filing under AS 45.55.040(h); 5. (Section 29, page 32, line 12) Replace current AS 45.55.060(d)(6) with the following: (6) the administrator may by regulation provide for an examination, which may be written or oral or both, to be taken by any class of or all applicants, [AS WELL AS PERSONS WHO REPRESENT OR WILL REPRESENT AN INVESTMENT ADVISER IN DOING ANY OF THE ACTS WHICH MAKE THE INVESTMENT ADVISER AN INVESTMENT ADVISER] including applicants for registration as investment adviser representatives of state investment advisers or federal covered advisers, if [PROVIDED THAT] examinations required by this paragraph are not required of a registrant under this chapter who was doing business in this state and was a resident of this state on May 9, 1959. 6. (Section 46, page 39, line 20) Replace current AS 45.55.900(a)(5) with the following: (5) a security issued in connection with an employee's stock purchase, savings, pension, profit- sharing, or similar employee's benefit plan, or a security issued by or an interest or participation in a church plan, company, or account that is excluded from the definition of an investment company under 15 U.S.C. 80a-3(c)(14) (Investment Company Act of 1940); 7. (Section 47, page 44, line 7) Replace current AS 45.55.900(b)(5)(C)(i) with the following: (i) the persons are promoters as the administrator may define "promoter" by regulation or order; and 8. (Section 47, page 44, line 18) Replace current AS 45.55.900(b)(5)(D)(ii) with the following: (ii) the seller provides full access to the buyer of the books and records of the enterprise or business; and 9. (Section 47, page 52, line 2) Replace current AS 45.55.900(b)(18)(H) with the following: (H) dissemination of the general announcement of the proposed offering to persons who are not accredited investors will not disqualify the issuer from claiming this exemption; 10. (Section 68, page 58, line 25) Replace current AS 45.55.980(f) with the following: (f) AS 45.55.020, 45.55.023, 45.55.030(c), 45.55.030(e), 45.55.040(h), and 45.55.170, so far as state investment advisers, federal covered advisers, and investment adviser representatives are concerned, apply when any act instrumental in effecting prohibited conduct is done in this state, regardless of whether [OR NOT] either party is then present in this state. Number 0841 REPRESENTATIVE HUDSON made a motion to adopt Amendment 1. There being no objections, Amendment 1 was adopted. Number 0873 REPRESENTATIVE HUDSON made a motion to move the proposed amendment 11 in Mr. Elder's letter as Amendment 2, noting it was a complete sectional addition to the bill. Amendment 2 (taken from Mr. Elder's April 16, 1998, letter) read: 11. (Section 75, page 63, line 17) Add to AS 45.55.990(23) a new section (C) as follows: (C) except for (37)(A)(ii) of this section, "investment adviser representative" does not include a person that would not be defined as an investment adviser representative under 17 C.F.R. 275.203A-3 adopted under 15 U.S.C. 80b-3A (Investment Advisors Act of 1940). CHAIRMAN ROKEBERG objected, indicating it was for discussion. He asked Mr. Elder to explain what the new Section 75 would be doing. Number 0896 MR. ELDER responded, "In NSMIA, the SEC is given the authority to define 'investment adviser representative' and so we have crafted ... the definition in our ... Act according to the definition that the SEC has already come up with." He said this paragraph would allow the department to automatically track with the SEC, noting investment adviser representative had never been defined before and there could be changes, especially in the first few years. If the SEC deleted someone from the definition of investment adviser, then the person would be automatically deleted from Alaska's definition as well. He noted the state could not differ from the SEC's definition of investment adviser representative. Number 0958 CHAIRMAN ROKEBERG asked for a definition of this representative. MR. ELDER said essentially an investment adviser representative is an agent of an investment adviser, whether it's a state investment adviser or federal covered investment adviser. When you walk into the office of a broker-dealer, the person you talk to about buying and selling stocks is an agent of that broker-dealer; he said the person actually giving the investment advice, representing that investment adviser is called an investment adviser representative. Number 0979 CHAIRMAN ROKEBERG asked where the line of demarcation was. He asked if the person had to be an employee, an adviser with a register corporation and additionally licensed themselves. MR. ELDER replied the person would have to be a supervised person of an investment adviser by definition, so he or she would either be the representative of state investment adviser registered with the state or a federal covered adviser registered with the SEC and noticed with the state. CHAIRMAN ROKEBERG confirmed that this person was advising in the actual acquisition, sales and purchasing of securities. Number 1019 MR. ELDER agreed, noting this person is giving the advice. CHAIRMAN ROKEBERG asked if the distinction was made that this person is not what is known as a financial planner or financial adviser. MR. ELDER said if a financial planner does not give investment advice and does not receive income for that advice separate from financial planning then that is correct. CHAIRMAN ROKEBERG commented many times a no-fee financial planner receives his or her compensation from fees provided by securities companies when the planner recommends securities, asking if these planners would be covered under this. MR. ELDER indicated that person would be required to be registered if he or she gives investment advice with respect to allocation of assets and specific securities. He confirmed someone who recommended a mutual fund purchase, for example, would be giving investment advice and would have to a registered investment adviser representative. Number 1067 REPRESENTATIVE JOE RYAN asked if the father of a friend, who gives very good investment advice, would have to become licensed under this, or only if he asked for a fee. MR. ELDER indicated the requirement would apply if the person held himself out to the public for a fee. Number 1077 CHAIRMAN ROKEBERG asked if the state of Alaska or the Division of Banking, Securities and Corporations had any particular regulatory authority over the area called financial planning unless these planners fall under the investment adviser representative definition. MR. ELDER answered in the negative. CHAIRMAN ROKEBERG said he wondered because it is a growing industry with very little regulation, definition, educational requirements, et cetera. He said there are national organizations that are somewhat self-policing, but there seems to be little state or federal regulation of these activities. MR. ELDER said that was correct, noting the department adds some language in here to make it very clear to people in that business that if they are giving investment advice, then they are investment adviser representatives. CHAIRMAN ROKEBERG asked if fee-based financial planners not compensated by mutual fund companies but receiving fees from the clients they were advising would be covered under the definition. MR. ELDER said it depends on what kind of advice the planners are giving. If these planners are giving financial planning advice, then they would not be covered by the investment adviser representative. If these planners were recommending something like additional equity exposure, specifying specific mutual funds that would fit the client's objectives, then they would be giving investment advice. Number 1180 CHAIRMAN ROKEBERG withdrew his objection to Amendment 2. There being no further objections, Amendment 2 was adopted. Number 1196 REPRESENTATIVE HUDSON made a motion to adopt amendments 12 and 13 in the April 16, 1998, letter as Amendment 3, indicating both suggested amendments were changing the date from November 1, 1999, to November 1, 1998. There being no objections, Amendment 3 was adopted. Amendment 3 (taken from Mr. Elder's April 16, 1998, letter) read: 12. (Section 78, page 67, line 6) Change the date from November 1, 1999 to November 1, 1998. 13. (Section 82, page 67, line 13) Change the date from November 1, 1999 to November 1, 1998. Number 1235 CHAIRMAN ROKEBERG noted Representative Ryan had provided an amendment to the committee, asking if Mr. Elder had seen this amendment. Representative Ryan's amendment, labeled 0-LS1426\A.1, Bannister, dated 4/24/98, later referred to as Amendment 4, reads: Page 44, lines 4 - 12: Delete all material and insert: "(C) to 10 or fewer persons who are to receive the initial issue of shares of a nonpublicly traded corporation, limited liability company, limited partnership, or limited liability partnership if a legend is placed on the certificate or other document evidencing ownership of the security stating that the security is not registered under this chapter and cannot be resold without registration or exemption from it;" Page 44, lines 4 through 12, in HB 486 read (as amended by Amendment 1): (C) to 10 or fewer persons in this state who are to receive the initial issue of shares of a nonpublicly traded corporation or limited liability company organized in this state if (i) the persons are promoters, as the administrator may define "promoter" by regulation or order; and (ii) a legend is placed on the certificate or other document evidencing ownership of the security, stating that the security is not registered under this chapter and cannot be resold without registration under this chapter or exemption from it; MR. ELDER said he saw the amendment shortly before this meeting. CHAIRMAN ROKEBERG stated it was not his intention to move HB 486 that day, he indicated it was his intention to move it at the next meeting, April 27, 1998. He asked if Mr. Elder would like more time to look over the suggested amendment or if he cared to comment at this time. Number 1278 MR. ELDER chose to comment, stating that the change that this would make to the new exemption that they had proposed, "(b)(5)(C)," would not affect the people they had in mind for "(b)(5)(C)." He indicated the amendment would broaden the exemption but not affect the people it was originally intended for. He said, "What we had in mind specifically for the '(b)(5)(C)' exemption was people who are incorporating their business and ... they're issuing the initial shares to themselves and not to the general public ...." He said this still deals specifically with the initial issuance, but said he sees two primary differences. He noted they have corporations and limited liability companies, and he said this adds limited partnerships and limited liability partnerships. He doesn't think that is a problem. The other thing it does is remove a reference to a requirement that the entity be organized in the state of Alaska; he also doesn't think that is a problem. The third thing he said it does is removes the requirement that these people, the ten or fewer persons, be promoters as defined by regulation. Promoters are currently defined in regulation essentially as people who directly or indirectly take an active role in forming the company. He noted that since this exemption is still limited to the initial issue of shares, presumably all of those people probably would be involved in the formation of the entity, and so that probably is also not a problem. On that basis, he said, while it is not their proposal and therefore they are not recommending it, they won't oppose it either. Number 1400 REPRESENTATIVE RYAN noted it was his amendment and explained why it was offered. He said, "Last year I submitted a bill, since the IRS [Internal Revenue Service] restrictions on limited liability companies (indisc.) criteria you had to meet depending on whether you're gonna be treated for taxation as a corporation or you could have passed from taxation or repealed by the IRS, and so we updated the limited liability company Act to reflect that IRS update, which makes it very easy to form, and so far Alaska's the only state that's done that, so we have got a major stake in business with the exception of this sticky point in registering these (indisc.). Companies are getting the exemption. Now, the agency or the department's been issuing a letter saying that, yeah, these aren't securities as such. And this has been the fly in the ointment for people who want to use these in the formations of trust and number of other things throughout the world, not just in Alaska. Alaska has this new updated limited liability company law and (indisc.) have these limited (indisc.--rustling) various purposes they want to outside of Alaska and there's no registration in other states, but Alaska had this thing, so I'm putting this amendment here to clean that up so that this will be open and we can take advantage of that Act and we can do the business we want to do. There was a very large company going to be (indisc.--coughing) million dollars (indisc.) assets and because of this sticky provision, they don't have to register in Florida and they don't want to register here, so the deal went sour. We stand to make a lot of money, and part of what this whole business in (indisc.) with trust and limited liability companies and so forth -- like to have Alaska as a - noticed as an estate planning venue, and this amendment would facilitate that, that's why it was offered." Number 1530 MR. ELDER added that simply because a security is exempt from registration does not mean it is exempt from the anti-fraud provision, so, if in fact, there was a problem with an abuse of some type the department would have authority to go after the issuer. Number 1552 REPRESENTATIVE RYAN requested to offer his amendment as Amendment 4. He mentioned an accompanying letter from Richard W. Hompesch, II, of Hompesch and Associates, Attorneys at Law. CHAIRMAN ROKEBERG asked if deleting the term "promoter" caused any problems, and if there were other purposes for having that term in regulation. Number 1612 MR. ELDER replied the reason they had added promoter was simply that what they had in mind was to provide an exemption for people who are forming their own companies, issuing stock to themselves, and not to the general public, with the reasoning of, "Why make them go through filing with the state?" He said they see this a lot, giving the example of a fisherperson in Petersburg who decides to incorporate, with the two spouses owning the business, incorporating, putting the assets of the fishing business into the corporation and issuing stock to themselves. In this example, these people currently have to send the state a letter and the department has to grant an exemption or write a letter stating the department won't take action against them. He said the department simply thought it would provide an automatic mechanism to cover people in those situations. Mr. Elder said that because those are people who are forming the company, they fit the definition of promoter which is why it was in there. He said it was in particular to distinguish these people from passive investors, commenting the committee would notice there is no disclosure requirement. Number 1721 REPRESENTATIVE RYAN commented that when a corporation is formed, a $40 fee and letter to the director of the Division of Banking, Securities and Corporations stating that these stocks aren't going to be publicly traded and are exempt from the SEC requirements. Number 1746 CHAIRMAN ROKEBERG said he understood, but noted he had not seen this letter and the department had not seen the letter. He said he respects Mr. Hompesch, but Mr. Hompesch says that the department "is gutting the benefit of new law by narrowly defining promoter," noting the chairman was not sure what that meant. Chairman Rokeberg said, "I don't think we're gonna have any trouble with this, but I certainly would have them have a chance to look at this. Would you have any objections to that ...." REPRESENTATIVE RYAN asked if he had seen the letter from Mr. Hompesch. MR. ELDER said he had not seen the letter. REPRESENTATIVE RYAN apologized, indicating he thought copies had been conveyed. Copies of the letter were distributed to the committee. Mr. Hompesch's April 23, 1998, letter via facsimile to Representative Ryan read: You asked if HB 486 in its current form resolves the securities bottleneck upon formation of Alaska limited liability companies and limited partnerships. HB 486 does not eliminate the problem. Section 47 of HB 486 should be amended (AS 45.55.900(b)(5)(C); lines 4 through 12 on page 44). Proposed language is attached. HB 486 adds new AS 45.55.900(b)(5)(C), but this provision has three defects. There are three problems. First, the exemption applies for sales made to 10 or fewer person in this state. There is no reason why an exemption should apply when sales are made in Alaska, but should not apply when sales are made outside Alaska. Any sales made outside Alaska are subject to regulation by federal and other state law. Federal and other state law is sufficient to regulate sales outside of Alaska without additional regulation from Alaska. Second, HB 486's version of AS 45.55.900(b)(5)(C)(i) does not apply to limited partnerships. Third, HB 486's version of AS 45.55.900(b)(5)(C)(i) would allow the Division to "gut" the benefit of the new law by narrowly defining "promotor" in such a way that few transactions would qualify for this exemption. Alaska would not benefit if HB 486 was passed and then the Division "took-away" the benefits by administrative order. I understand that Bob Manley and Dave Shaftel spoke with Terry Elder this morning and that Mr. Elder agreed to an amendment that would allow an exemption for family members. A copy of this amendment is attached along with a cover sheet from Dave Shaftel's office. Unfortunately the amendment does not include a good definition of "family members." It is unclear whether step-parents would be considered to be "family members." If you have any questions, please call me. Number 1800 CHAIRMAN ROKEBERG indicated his intention was allow everyone the opportunity for review, taking HB 486 up first thing at the next committee meeting. He noted that if the department wanted to look at that, and if there were any other amendments, the committee could take them up and proceed quickly with them. REPRESENTATIVE RYAN asked if the chairman had any objection to his amendment. CHAIRMAN ROKEBERG indicated he brought it up to see if the department had any objections. He asked for an explanation of limited liability partnership, asking Representative Ryan if they created that with the bill last year. MR. ELDER said it was a relatively new entity. REPRESENTATIVE RYAN commented he thought it was created a couple of years ago in a bill by Representative Gene Therriault. MR. ELDER said it is a fairly new entity and the department is simply adding it because it and limited liability companies are entities that didn't exist when the securities Act was passed. CHAIRMAN ROKEBERG noted it was not in the department's version but it was in Representative Ryan's. MR. ELDER said that did not, by itself, present a problem. CHAIRMAN ROKEBERG asked about limited partnerships, questioning if there were restrictions relating to the ten or under, and how those limited partnerships were handled because those entities are brought into this amendment. MR. ELDER answered in the negative, stating that limited partnerships would not create a problem. He said the expansion from corporations and limited liability companies to include limited partnerships and limited liability partnerships would not present a problem. CHAIRMAN ROKEBERG asked if that was because of the numbers of people. MR. ELDER said because of the numbers of people and because this is limited to the initial issuance. CHAIRMAN ROKEBERG asked what the threshold was for limited partnerships. He asked if registration was required for over ten people or if it was a dollar amount. MR. ELDER replied that was not his area and he did not know. REPRESENTATIVE RYAN stated, "Basically limiting the liability of the partners -- in previous in a partnership, everybody is (indisc.) -- you owe whatever your partner runs up. In a limited partnership you have ..." CHAIRMAN ROKEBERG interjected he knew that, but was wondering what the restrictions are in the balance of the laws related to limited partnership because they are not spoken to in this section. Number 1963 VINCE USERA, Assistant Attorney General, Commercial Section, Civil Division, Department of Law, offered his assistance. He said the limitation is no more than 10 investors and $500,000 for a limited partnership that does not have to go through registration. CHAIRMAN ROKEBERG noted, then, there was an another requirement relating to the dollar amount. REPRESENTATIVE RYAN commented it was (indisc.) capitalization. CHAIRMAN ROKEBERG asked Representative Ryan if adding that would have any bearing on this. REPRESENTATIVE RYAN said the flexibility of limited liability companies and partnerships are the reason for passing this law. CHAIRMAN ROKEBERG confirmed Mr. Usera was familiar with the amendment and had no comments on it. MR. ELDER indicated he did not think the department's position on the amendment would change between that meeting and the Monday, April 27 meeting. He said that while they had something specific in mind when they added the "(b)(5)(C)" exemption, he does not think they would have any objection to this although they are not recommending it. Mr. Elder said their major concern is to get the bill through as expeditiously as possible. Number 2125 CHAIRMAN ROKEBERG indicated the bill would be moved very rapidly at the next meeting, but he was wondering about Mr. Hompesch's statement that the department narrowly defines promoter, noting the bill allows the department to define promoter by regulation in the future and he wonders how narrow that is. Number 2137 MR. ELDER noted he had not spoken with Mr. Hompesch about that and he has never heard that the department defined promoter too narrowly. He said it is defined in regulation and the department will be redoing its regulations as a result of this legislation, noting there would be ample opportunity for recommendations to the department regarding the definition of promoter or anything else. CHAIRMAN ROKEBERG asked if promoter was used elsewhere in the bill so that its removal here would not damage the department's ability to define it. MR. ELDER said it is used elsewhere and this would not hurt that ability of the department. Number 2171 REPRESENTATIVE RYAN made a motion to move the amendment he had submitted, labeled 0-LS1426\A.1, Bannister, dated 4/24/98, as Amendment 4. There being no objections, Amendment 4 was so adopted. REPRESENTATIVE RYAN asked Mr. Elder for his opinion of Mr. Shaftel's proposed amendment for family transactions included with Mr. Shaftel's April 23, 1998, facsimile. Representative Ryan noted the language "fourth degree of affinity or consanguinity (including adoption)." MR. ELDER indicated he was familiar with the amendment and the department would not have any problem at all with that amendment. CHAIRMAN ROKEBERG interjected that the committee did not have copies of Mr. Shaftel's communication and amendment. Copies were provided to the committee. Number 2280 CHAIRMAN ROKEBERG called a brief at ease at 4:05 p.m. The committee came back to order at 4:08 p.m. [THE TAPE WAS CHANGED WHILE THE COMMITTEE WAS AT EASE] TAPE 98-51, SIDE A Number 0001 CHAIRMAN ROKEBERG stated the committee has before it an amendment recommended by Mr. Shaftel regarding transactions involving family members. He asked Mr. Elder to speak to the amendment. Number 0038 MR. ELDER explained that he spoke to some members, including Mr. Shaftel of the Anchorage Bar Association, who have worked in the area of state planning and probate. He said, "They're also fairly active in making filings with our division. They indicated a desire to add an exemption, and this is the exemption they sent me, which would essentially exempt transactions involving only family members. And to a large extent, these are - the way they are now these are limited partnerships often that are created and funded by the parents that go into children's and grandchildren's trust accounts and things like that, that currently they may not fit an exemption. And the way it is now, the attorneys write us a letter and ask us not to take action against them for not registering the transactions and we routinely provide that letter to them. And so on that basis, we wouldn't have a problem with this. This simply says if you're doing something in the family then we won't get involved, you're not doing it to the general public." Number 0175 CHAIRMAN ROKEBERG said that it looks like there are 19 exemptions. Number 0198 MR. ELDER agreed and said the proposed amendment would go under [AS] 45.55.900 which lists the exemptions. In the bill it would be on page 52 and it would probably be item 20. Amendment 5 reads: Add a new subsection to AS 45.55.900(b), as follows: (Number) a transaction involving only family members who are related within the fourth degree of affinity or consanguinity (including adoption). Number 0231 CHAIRMAN ROKEBERG said, "The committee will mark the amendment up to make this subsection 20 and then mark it up as Amendment Number 5. The Chair would entertain a motion on Amendment 5." REPRESENTATIVE JERRY SANDERS moved that Amendment 5 be adopted. There being no objection, Amendment 5 was adopted. CHAIRMAN ROKEBERG referred to the fiscal note and asked Mr. Elder to explain the "notice and fee" comments. He asked how the money is collected and how would it be jeopardized by the failure to adopt the bill. Number 0305 MR. ELDER stated that before NSMIA passed in 1996, securities had to be either registered or exempted and with that, they had to pay a registration fee or an exemption fee. When NSMIA passed and created the federal covered security, it defined a certain type of security that it calls "covered security" and it says that states may not register those securities. If that's all it did, then they would no longer have to register in the state to sell those securities in the state and wouldn't pay any fees. But Congress wanted NSMIA to be revenue neutral to the states so it said, "Even though the states can't register them, we will allow the states to require a notice filing so that the states will at least know that those securities are being offered here and pay a notice fee," which is roughly equivalent to what they were paying before. He said "What the -- the largest group of securities by far and away - by far and away the largest group of securities affected here in Alaska are mutual funds. The mutual funds that are sold here in the past would be registered here and would file a registration and pay a registration fee." He stated that currently, they give us a notice and pay a notice fee. That can be done temporarily as that ability runs out in 1999, and that is why the act has to be amended. MR. ELDER pointed out that the fiscal note refers to the revenues lost and said 99.9 percent of the data the department is providing to the committee is from mutual fund filings. They generate in excess of $4 million per year and have been growing at 14 percent. Number 0460 CHAIRMAN ROKEBERG said, "In the event that a mutual fund share is sold in the state, there is a ultimate payback to the state treasury or is it because they register and do business in this state." Number 0471 MR. ELDER responded, "Because they register to sell their fund here, they have to -- they pay a fee and that fee, frankly, goes toward offsetting the cost to the state for investor protection and other things that make markets work well." CHAIRMAN ROKEBERG asked if it is based on the fact that they want to have the right to sell the fund in the state or is based on their volume. He also asked if there is annual fee. Number 0499 MR. ELDER stated that it is the right to sell in this state. In the past, the fee has been based on volume. He said it doesn't have to be based on volume as some states have a flat fee. CHAIRMAN ROKEBERG asked if it is annual volume fee. Number 0519 MR. ELDER stated that is set by regulation. In the past, it has been a volume fee. In other words, the fee was $100 plus 1/10 of 1 percent of what you want to sell in Alaska up to a maximum of $3,000. He indicated if a person wanted to register $100,000 worth of his or her fund, it would cost $200. He reiterated that a lot of states have gone to a flat fee, especially with the notices. Mr. Elder noted the Investment Company Institute that represents mutual funds supports this legislation. CHAIRMAN ROKEBERG indicated the legislation would be held. ADJOURNMENT CHAIRMAN ROKEBERG adjourned the House Labor and Commerce Committee meeting at 5:15 p.m.