HOUSE LABOR AND COMMERCE STANDING COMMITTEE February 19, 1999 3:25 p.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative Andrew Halcro, Vice Chairman Representative John Harris Representative Sharon Cissna MEMBERS ABSENT Representative Jerry Sanders Representative Lisa Murkowski Representative Tom Brice COMMITTEE CALENDAR HOUSE BILL NO. 83 "An Act relating to the licensing of, acts and practices of, notice filings required of, duties of, registration of, capitalization of, financial requirements for, bonding of, coordinated securities examinations of, recordkeeping by, and documents filed by certain securities occupations; relating to public entity investment pools; relating to investment advisory contracts; relating to the examination of records of certain securities occupations; relating to federal covered securities; relating to the registration of securities; relating to the general exemptions for securities and transactions; relating to offers of securities on the Internet; relating to the confidentiality of investigative files under the Alaska Securities Act; relating to the payment by certain securities occupations of expenses and fees of investigations and examinations; relating to petitions to superior court by the administrator to reduce civil penalties to judgment; exempting certain violations of the Alaska Securities Act from criminal penalties; relating to time limitations in bringing court actions for violations of the Alaska Securities Act; relating to the affirmative defense of timeliness in court actions relating to securities; prohibiting certain lawsuits involving buyers of securities; relating to time limitations for bringing court actions involving the receipt of a written offer related to securities; relating to offers to repay buyers of securities; relating to notification of certain securities occupations regarding administrative hearings; relating to fees established by the administrator; relating to a sale, a purchase, or an offer to sell or purchase under the Alaska Securities Act; relating to the locations of offers to buy or sell; relating to consent to service; amending the Alaska Securities Act definitions of 'agent,' 'broker-dealer,' 'person,' 'Securities Act of 1933,' and 'security;' defining for purposes of the Alaska Securities Act 'advisory client,' 'advisory fee,' 'advisory services,' 'Bank Holding Company Act of 1956,' 'clients who are natural persons,' 'federal covered adviser,' 'federal covered security,' 'Federal Deposit Insurance Act,' 'Home Owners' Loan Act,' 'investment adviser representative,' 'Investment Advisers Act of 1940,' 'investment advisory business,' 'investment advisory contract,' 'Investment Company Act of 1940,' 'NASDAQ,' 'National Securities Markets Improvement Act of 1996,' 'notice filing,' 'place of business,' 'principal place of business,' 'Securities Exchange Act of 1934,' 'securities business,' 'state investment adviser,' 'substantial portion of the business,' 'supervised person,' and 'viatical settlement'; relating to the title of the Alaska Securities Act; relating to the definitions in the Alaska Securities Act of 'assignment' and 'investment adviser'; relating to implementation of the changes to the Alaska Securities Act; and providing for an effective date." - HEARD AND HELD (* First public hearing) PREVIOUS ACTION BILL: HB 83 SHORT TITLE: ALASKA SECURITIES ACT SPONSOR(S): LABOR & COMMERCE BY REQUEST Jrn-Date Jrn-Page Action 2/08/99 163 (H) READ THE FIRST TIME - REFERRAL(S) 2/08/99 164 (H) L&C, JUD 2/17/99 (H) L&C AT 3:15 PM CAPITOL 17 2/17/99 (H) HEARD AND HELD 2/17/99 (H) MINUTE(L&C) 2/19/99 (H) L&C AT 3:15 PM CAPITOL 17 WITNESS REGISTER FRANKLIN TERRY ELDER, Director 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 on HB 83, answered questions. JACK GWALTNEY, President Premiere Investments and Insurance 7118 Linden Drive Anchorage, Alaska 99502 Telephone: (907) 297-7309 POSITION STATEMENT: Testified on HB 83 regarding viatical settlements. DAVID GWALTNEY 6217 Chevigny Street Anchorage, Alaska 99502 Telephone: (907) 297-7302 POSITION STATEMENT: Testified on HB 83 regarding viatical settlements. ACTION NARRATIVE TAPE 99-10, SIDE A Number 0001 CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce Standing Committee meeting to order at 3:25 p.m. Members present at the call to order were Representatives Rokeberg, Halcro, Harris and Cissna. HB 83 - ALASKA SECURITIES ACT Number 0044 CHAIRMAN ROKEBERG announced the committee's order of business was HB 83, "An Act relating to the licensing of, acts and practices of, notice filings required of, duties of, registration of, capitalization of, financial requirements for, bonding of, coordinated securities examinations of, recordkeeping by, and documents filed by certain securities occupations; relating to public entity investment pools; relating to investment advisory contracts; relating to the examination of records of certain securities occupations; relating to federal covered securities; relating to the registration of securities; relating to the general exemptions for securities and transactions; relating to offers of securities on the Internet; relating to the confidentiality of investigative files under the Alaska Securities Act; relating to the payment by certain securities occupations of expenses and fees of investigations and examinations; relating to petitions to superior court by the administrator to reduce civil penalties to judgment; exempting certain violations of the Alaska Securities Act from criminal penalties; relating to time limitations in bringing court actions for violations of the Alaska Securities Act; relating to the affirmative defense of timeliness in court actions relating to securities; prohibiting certain lawsuits involving buyers of securities; relating to time limitations for bringing court actions involving the receipt of a written offer related to securities; relating to offers to repay buyers of securities; relating to notification of certain securities occupations regarding administrative hearings; relating to fees established by the administrator; relating to a sale, a purchase, or an offer to sell or purchase under the Alaska Securities Act; relating to the locations of offers to buy or sell; relating to consent to service; amending the Alaska Securities Act definitions of 'agent,' 'broker-dealer,' 'person,' 'Securities Act of 1933,' and 'security;' defining for purposes of the Alaska Securities Act 'advisory client,' 'advisory fee,' 'advisory services,' 'Bank Holding Company Act of 1956,' 'clients who are natural persons,' 'federal covered adviser,' 'federal covered security,' 'Federal Deposit Insurance Act,' 'Home Owners' Loan Act,' 'investment adviser representative,' 'Investment Advisers Act of 1940,' 'investment advisory business,' 'investment advisory contract,' 'Investment Company Act of 1940,' 'NASDAQ,' 'National Securities Markets Improvement Act of 1996,' 'notice filing,' 'place of business,' 'principal place of business,' 'Securities Exchange Act of 1934,' 'securities business,' 'state investment adviser,' 'substantial portion of the business,' 'supervised person,' and 'viatical settlement'; relating to the title of the Alaska Securities Act; relating to the definitions in the Alaska Securities Act of 'assignment' and 'investment adviser'; relating to implementation of the changes to the Alaska Securities Act; and providing for an effective date." Chairman Rokeberg indicated some teleconference testimony would be received in addition to Mr. Elder's testimony. Number 0088 FRANKLIN TERRY ELDER, Director, Division of Banking, Securities and Corporations, Department of Commerce and Economic Development, came forward to testify on HB 83. Number 0102 CHAIRMAN ROKEBERG indicated Mr. Elder had provided letters regarding the legislation to the committee. The chairman also complimented Mr. Elder on his recent appointment as division director. Chairman Rokeberg referred to three letters: 1) from the Division of Banking, Securities and Corporations to Mr. Jack Gwaltney of Premiere Investments and Insurance in Anchorage alleging that Mr. Gwaltney was marketing a security on a viatical settlement issue improperly under statute. 2) A reply to the state from Mr. Gwaltney dated that day. 3) A letter from Mr. Elder to Chairman Rokeberg regarding the general issue with some back-up regarding the status of viatical settlements. CHAIRMAN ROKEBERG stated the issue was whether or not viatical instruments were securities, noting there was case law in both directions. He indicated Maine had enacted formal legislation, and Missouri and Oregon had bills pending. The chairman described that viaticals were the "securitization" or sales of interests in insurance proceeds from, normally, someone who was dying prematurely. He indicated Marianne Burke, Director, Division of Insurance, Department of Commerce and Economic Development, believed the Division of Banking, Securities and Corporations was the proper domain for viatical instruments, as Mr. Elder and his staff had asserted relating to Mr. Gwaltney's case. He noted the issue was one of turf: whether viaticals should be regulated by insurance or the securities board. Chairman Rokeberg commented Mr. Gwaltney was present via teleconference to testify. The chairman mentioned there were three or four provisions in the bill regarding the viatical agreement. Number 0322 MR. ELDER said there were three: 1) a definition of viaticals, 2) a changed in the definition of "security" adding viaticals, 3) a changed in AS 45.55.080 adding viaticals to "registration by notification." CHAIRMAN ROKEBERG asked if the legislation's provisions concerning viaticals were necessary for the collection of fees being discussed, the reason this legislation was necessary. Number 0364 MR. ELDER replied the provisions were a non-NSMIA [National Securities Market Improvement Act, 1996] part of the bill; the provisions were not part of the changes needed to the Alaska Securities Act [Alaska Securities Act of 1959, AS 45.55] to continue collecting fees. CHAIRMAN ROKEBERG confirmed from Mr. Elder that he was not opposed to the removal of the bill sections concerning viaticals, to be addressed in separate legislation, if that would facilitate HB 83's passage. The chairman indicated removing those sections from HB 83 would be his desire based on his current understanding, with the committee taking that issue up separately. He indicated he believed it was necessary to define the Division of Banking, Securities and Corporations' statutory authority for their actions in this area. Number 0516 JACK GWALTNEY, President, Premiere Investments and Insurance, testified next via teleconference from Anchorage. He spoke from a prepared statement: "Chairman Rokeberg and members of this committee. Thank you for the opportunity to discuss HB 83 and recent requirements and allegations from the Division of Banking and Securities [Division of Banking, Securities and Corporations] that is adversely affecting commerce and the consumers of Alaska .... "My discussion today partially deals with what I feel is a constitutional breach of rights. Further, I am somewhat incensed by the implication that I have broken a statute which hasn't even been put in place and that 'formal action will be held in abeyance pending response.' If it turns out that legislation passes which makes viatical investments a security, you can rest assured I will never attempt to sell another viatical. To have the specter hanging over my head that I could be charged with criminal action is quite alarming. When I first spoke to Mr. Salveson of the Division of Banking and Securities, whom I called after one of our agents received a phone call to cease and desist, I agreed verbally at that time to cease and desist until as he put it, 'We can get this thing straightened out.' Now comes a letter indicating I might be charged with violation of the Alaska Securities Act, and that I am required to submit the names of my clients and many other documents, which I'm prepared to do. "The definition of viatical has most definitely not been addressed by statute in this and many other states. Of those states which have classified the product, all have opted for a definition in favor of being guided under insurance laws and not securities. Apparently there have been some exceptions to that at this point. The legislature in Alaska can choose to classify the product as it wishes, though it looks likely they will be one of the few states that have opted in the direction that HB 83 seems to be heading on this issue, and again I'm aware that there are some others. "It is my understanding the state of Florida has enacted legislation that has served as a model to many other states. One of the main questions at issue with the Division of Securities and Banking is that they consider viaticals an investment contract. Thus far viaticals seem have been viewed as personal property similar to real estate. In real estate, a purchaser is exchanging money for property of value. This represents a fixed value, not the definition of a security. Also at issue is the fact that most policies are sold in fractional amounts which usually constitute several parts of the face value of a policy, or otherwise called a death value. I have provided Representative Rokeberg with additional information of this subject. "The Future First Viatical settlement program does not meet the definition of a security under SEC [Securities and Exchange Commission] v. W.J. Howey Company, 328 United States 293 in 1946. The Supreme Court under section 2.1 of the Securities Act defined an investment contract 'as an investment of money undertaken with the expectation of profit, whose profits are derived solely from the efforts of others with existence of a common enterprise.' The assertion that viatical settlements require an investment of money with the expectation of profit cannot be argued. We can easily argue, however, that it seems apparent to reasonable people that 'profit derived solely from the efforts of others,' and 'existence of a common enterprise' remain definitely excluded. Further, viaticals do not place principal at risk and provide a guaranteed return subject to carrier solvency, which is a separate issue addressed under Title 21 of the Alaska Statutes, and viaticals have not been deemed securities by the SEC, which seems to carry as much weight as any argument I can imagine. "My immediate concern is the arbitrary application of a cease and desist order on a product which is not addressed in any current statute or regulation, and, to my understanding and research, is only now pending definition. One of my associates has performed a word search on what I believe are the statutes relating to both Titles 45 and 21, and the term 'viatical' is not found, at least at this point. It appears to me that the allegation that these products conform to the investment securities Act seems to be a matter of opinion until it is defined by statute. "Issuing a cease and desist order without defined regulatory authority seems to be a classical breach of constitutional rights. It is my understanding that regulators exist to protect the public interest and welfare. Regulators protect the public at large from unscrupulous providers and inappropriate products. The sale of viaticals at present represents no such threat to public welfare. These products have been sold for a long time and, in my experience, have yet to have a single consumer complaint in Alaska. Consumers are now unable to exercise their right to purchase these products. "During a similar controversy over surplus lines and the Division of Insurance, the division solicited advice, counsel and testimony from numerous sources and began issuing bulletins on findings. A subsequent law was promulgated and enforced with a defined inception date, and penalties for noncompliance. This was a reasonable approach to the situation. During the fact-finding period, no producers were held to a standard or law that 'might' be passed. They dealt only with what was, then offered a period of time to gain compliance after the law was passed. Do these products need to be regulated? Of course they do, most definitely they do. I feel that they are reflective of insurance products more than securities or investment products. Again, Representative Rokeberg is in possession of preliminary information that will support this position. Even so, in the absence of statutory regulation we, the public, cannot be held accountable for laws that do not exist. "Please note, without question, if HB 83 passes in its current form, we will comply with all appropriate law and statutes, just as I have with the insurance law for the past 38 years without incident, allegation or consumer complaint. "To summarize, I am complying with the cease and desist order despite the fact I feel it's grossly inappropriate. I will follow this testimony with additional correspondence to prove my point for the Division of Insurance." MR. GWALTNEY thanked the committee for its attention and the opportunity to participate. Number 1000 CHAIRMAN ROKEBERG confirmed Mr. Gwaltney had understood the previous comments about removing the viatical settlement instruments from HB 83 and addressing them with another piece of legislation. MR. GWALTNEY noted he had understood, commenting he thought that was a step in the right direction. He reiterated that he was certainly in favor of regulation. CHAIRMAN ROKEBERG indicated Mr. Gwaltney had said he would stop selling viaticals if enforcement or a new law was "retrospective," asking Mr. Gwaltney to explain his comment about withdrawing from the business because of this regulatory threat. Number 1061 MR. GWALTNEY replied he would be withdrawn because he was not currently securities licensed and could not sell the product if it became a securities product, noting for 20 years he had been securities licensed, but had decided not to be a few years ago. Mr. Gwaltney emphasized he wanted to comply with the law, whichever way it went. CHAIRMAN ROKEBERG stated the committee would take special note of that in the record. He indicated, however, his concern was regarding "retrospectivity" and if that happened Mr. Gwaltney had said he would have to get out. The chairman confirmed it would be helpful to Mr. Gwaltney if they "came up with a new regulatory scheme in statute and regulation that excluded any prior enforcement ...." Number 1130 DAVID GWALTNEY testified next via teleconference from Anchorage. He stated he was representing himself because his licensure for viatical sales was a personal licensure. For the record, Mr. D. Gwaltney stated he was the current compliance officer, manager, and president of Gwaltney and Gwaltney, Incorporated, an Anchorage-based insurance and accounting firm since 1984; president, Alaska Independent Insurance Agents and Brokers Association, Incorporated, the affiliate of the Independent Insurance Agents of America (IIAA); a property casualty representative of the state of Alaska Division of Insurance continuing education advisory committee; member of the national faculty for the Society of Certified Insurance Counselors (Society of CIC), and numerous other faculties for continuing education and boards of directorships. He concurred with Mr. Jack Gwaltney's testimony. He stated, "In addition, I wish to argue the point of logic as to the actual nature of a viatical settlement. As you know, numerous state and federal courts have upheld that the proceeds of life insurance policies are personal property. They are originally sold as an estate asset or estate builder, and have always been regulated by the Division of Insurance. Further, proceeds are taxed as personal property, not as securities. [The] best comparison to [a] mature life insurance policy may be your own personal residence. Both the residence and the life insurance proceeds are considered personal property, not securities. To sell viaticals as securities would be the same as selling your house as a security. At this point you may sell your house to whomever and whenever you want. Selling any personal property as a security provides undue complication." Mr. D. Gwaltney indicated that concluded his remarks. CHAIRMAN ROKEBERG indicated it was his or the committee's intention to introduce new legislation regarding viaticals, then discussing the legislation with the Gwaltneys and Mr. Elder. Number 1271 MR. D. GWALTNEY asked if there would be a determination in the next few days whether or not the "cease and desist" order would be maintained. CHAIRMAN ROKEBERG indicated he would let Mr. Elder speak to the Gwaltneys' case. Number 1289 MR. ELDER clarified that no order had been issued by the division. He noted the Gwaltneys had been sent a letter and had voluntarily agreed to provide information and cease marketing, and the division appreciated that cooperation. Mr. Elder stated the Gwaltneys needed to provide the requested information. After the information was received, the division could make a determination whether it was an investment contract covered by the Alaska Securities Act, which would require either registration or exemption, or it was not an investment contract. Mr. Elder stated the division would try to make that determination rapidly. CHAIRMAN ROKEBERG indicated, then, the division might determine the product the Gwaltneys were selling was an exempt security, and not an investment contract. Number 1346 MR. ELDER replied that was not exactly correct, noting the "investment contract" was one of the definitions of a security. He said one possibility was the determination that it was investment contract and therefore covered by the Alaska Securities Act, requiring either registration or exemption. If this was found, the division could then examine what had been done so far to see if the transactions fit an exemption. CHAIRMAN ROKEBERG confirmed that once the division saw the materials requested from Mr. Gwaltney, the division would hopefully have enough information to determine whether "it" [viaticals] would be exempt or would require registration. The chairman commented that if it was exempt, there might be a simple procedure, such as a letter filing, that would meet the division's needs. Number 1402 MR. ELDER stated he couldn't know that right now, but said that even if it required registration the division would certainly work with the Gwaltneys to effect the registration as quickly as possible, noting they had done that in the past. CHAIRMAN ROKEBERG asked if it was Mr. Elder's opinion that the division had the ability to attempt to identify these viatical instruments as securities. MR. ELDER said that was their job. CHAIRMAN ROKEBERG indicated that since viaticals were not directly addressed in the statutes as covered, legal counsel could easily theorize that the division did not have that authority. Number 1440 MR. ELDER agreed, noting any decisions and actions taken by the division were appealable, and that ultimately hearings or courts decided whether or not the division had taken the proper action initially. CHAIRMAN ROKEBERG indicated he thought there seemed to be general consensus that there needed to be regulation, but removing the viatical settlement issue from HB 83 would help expedite its progress. He thanked the Gwaltneys and indicated the committee would be in contact with them. Number 1505 MR. ELDER noted for Representative Harris that once the Gwaltneys provided the requested information, the division could proceed with making its determination. Number 1523 MR. GWALTNEY [possibly Jack] stated they would get that information out the first of the week, and had had full intentions to do so. He indicated he appreciated any expeditious handling. He further indicated if the determination was something they could not work with, they, as well as others, would back away from that area. CHAIRMAN ROKEBERG commented about not wanting to impede commerce in the state per Mr. Gwaltneys' testimony. The chairman stated that terminated the testimony and his intention would be to amend the bill to remove references to viatical settlements, immediately taking up other legislation on the viatical settlement issue. He commented that in examining this issue they were really at the country's cutting edge, referring to Maine's legislation as the only state that had formally adopted such a statutory scheme. Number 1681 REPRESENTATIVE CISSNA admitted her unfamiliarity with the area and referred to page 22 [23], Section 10, line 6. She asked for clarification on why it was important to grant an exception to people who were not transacting business in Alaska and did not have a place of business in the state. Number 1733 MR. ELDER replied that agents of broker-dealers had to be registered in each jurisdiction they conducted business in, regardless of their office location. Currently there were 38,000 agents of broker-dealers registered in Alaska, noting sometimes some of the larger firms did blanket registrations for all of their agents in every state and that the registration fee was $75. Different requirements through NSMIA apply to investment adviser representatives. States can only register investment adviser representatives of those large federal covered advisers if the investment adviser representatives have a place of business in the state and meet certain other criteria. NASAA [North American Securities Administrators Association, Incorporated] and the individual states disagreed, feeling the investment adviser representatives should be registered in the jurisdiction. However, Mr. Elder said they are bound by the federal law. He confirmed the section Representative Cissna referred to was in compliance with the federal law, even though it might not have been agreed with it. Number 1862 REPRESENTATIVE CISSNA asked how many other sections of the bill had exemptions, in compliance with the law, for people from outside the state without a place of business in Alaska. Number 1891 MR. ELDER said, if he understood the question correctly, that investment adviser representatives would be the primary example - those who were doing business in the state without an in-state place of business and who therefore could not be registered. Referring to the definition of a broker-dealer, he stated there was also an exclusion from registration under certain circumstances for broker-dealers without an in-state place of business: either having only certain types of institutional clients or a limited number of other transactions in the state. REPRESENTATIVE CISSNA referred to Section 13, page 22, questioning why they seemed to be opening up another market for Canadian broker-dealers [Sec. 45.55.035. Limited Registration of Canadian broker-dealers and agents.]. Number 1965 MR. ELDER noted this was a new section and would be considered non-NSMIA, but its language was drafted by NASAA and supported by the securities industry associations representing all of the broker-dealers. He indicated they had received letters of support from these organizations. This section was not opening up the market to Canadian broker-dealers; it was allowing these broker-dealers to provide investment services to their current clients residing in Canada who might be temporarily in Alaska and was a limited registration in that regard. It did not allow these broker-dealers to compete for new Alaska business with a broker-dealer registered in the state. Mr. Elder stated the section was the registration, and was limited to those Canadian broker-dealers whose home offices were in Canadian provinces that provided the same rights to United States broker-dealers. These Canadian broker-dealers would have to register in Alaska if they wanted to compete with the other firms registered in Alaska like Merrill Lynch and Company, Incorporated and Salomon Smith Barney Incorporated. Number 2070 CHAIRMAN ROKEBERG indicated he had had the same concern. He noted a Canadian broker-dealer like Gruntal and Company, Incorporated based in Toronto, Ontario was a major Wall Street player with clients throughout the United States and was most likely registered as a broker-dealer in Alaska. The chairman confirmed from Mr. Elder that such a company would be doing business under Alaska registration, not under this particular clause. He referred to Section 45.55.027 [Section 45.55.027. Additional fraudulent, dishonest, and unethical business practices of agents], subsection (10) on page 21, line 3, in Section 9 of the bill: "(10) failing to disclose a dual agency capacity; or". He stated he had asked Mr. Elder to provide a definition of "dual agency" consistent with NSMIA, NASAA, et cetera, to be inserted as a conceptual amendment to make those standards of practice clear. He indicated this definition was necessary because each profession had its own understandings, and standards of conduct and practice, commenting on the complexity of the meaning of dual agency in the real estate field alone. Chairman Rokeberg noted he had a few more questions and would like to have a few amendments passed, with the intention of bringing a committee substitute before the committee on Monday [February 22, 1999]. He confirmed he wished to move amendments regarding viatical settlements and dual agency. The chairman directed to Mr. Elder a question about Section 12, subsection (f), on page 22 ["(f) A person may not be registered concurrently as an agent of more than one broker-dealer or issuer. The administrator may waive this restriction ....] He noted a broker-dealer usually had multiple issues and questioned whether an issuer was a specific entity within the statute. Number 2263 MR. ELDER explained there were two kinds of agents: 1) agents representing broker-dealers, 2) agents representing issuers. The issuer is the entity issuing the stock or bond; agents of issuers sell that stock or bond and represent that issuer. Unless this restriction was waived, agents of broker-dealers could only represent one broker-dealer and agents of issuers could represent only one issuer. Mr. Elder gave the example of IBM [International Business Machines Corporation] selling stock through broker-dealers to the public, noting those [broker-dealer] agents were acting representatives of their broker dealer, not IBM. Regarding an agent for an issuer, Mr. Elder gave the hypothetical example of a local brewery choosing to sell some stock through someone, not a broker-dealer, who was employed by the brewery to do this and who was paid through commission. He clarified this person was usually already an employee of the company, noting there was already an exemption for officers and directors, who were also usually not paid a commission when they made these sales. However, he indicated someone in a company's finance section who did this and was paid a commission should be registered as an agent of an issuer. Mr. Elder commented there were approximately 80 agents of issuers currently registered. Number 2408 CHAIRMAN ROKEBERG confirmed the language in the legislation "a person from Canada who is" did not require that person to be a Canadian citizen. Referring to page 25, line 23 ["The application must ... contain whatever information the administrator by regulation may require ..."], he noted this was a change to an existing statute and asked if the regulations were already in place. Number 2442 MR. ELDER answered in the affirmative, commenting they would also revise their regulations after the legislation's passage. He noted they were 99 percent done with the regulation writing, but there were some sections which would require further work. He referred to the current 123-page single-sided version of the regulations, noting both the deleted and new language would be retained. TAPE 99-10, SIDE B Number 0001 CHAIRMAN ROKEBERG referred to page 26 [from tape log notes], lines 27 and 28 [26 through 29], "(d) A registered broker-dealer, state investment adviser, or a federal covered adviser who has filed notice under this chapter may file an application for registration or notice filing, as applicable, of a successor for the unexpired portion of the year regardless of whether the successor is then in existence." He questioned that meaning. Number 0034 MR. ELDER replied it was usually for a situation like a merger when a successor was created. First, the broker-dealer, state investment adviser or federal covered adviser would change, then bring along the various employees and representatives. He clarified for the chairman that the successor was created, the businesses become the successor, and the registered agents transferred to that new entity. The reason this section was desirable was to avoid requiring the involved parties to start over "from scratch" in terms of registration when a successor was created from a previously registered or noticed entity. He indicated the creation of the successor was usually just a perfunctory change of name and sometimes address. Number 0101 CHAIRMAN ROKEBERG referred to page 27, line 27, "(g) The administrator may permit initial and renewal registration ...", questioning the use of the discretionary "may" rather than the prescriptive "shall" in the existing statute. MR. ELDER noted one would never want to say that the state "shall" register someone if that person was not qualified. CHAIRMAN ROKEBERG questioned where the three-year record retention requirement mentioned on page 30, line 2 and referred to in line 15 came from [lines 2 and 3, from subsection (e): "... All required records shall be preserved for three years unless the administrator by regulation prescribes otherwise."]. Number 0160 MR. ELDER stated those were their current requirements and confirmed that length of retention worked for their investigations. He confirmed there was a three-year statute of limitations for civil actions although he thought criminal actions went back five years. He indicated this three-year requirement could be changed by regulation if it was ever found to be a problem. Mr. Elder noted the chairman's reference to line 15 in subsection (h) ["(h) A state investment adviser that has its principal place of business in a state other than this state and the investment adviser representatives of that state investment adviser are exempt from the requirements of (e) of this section if the state investment adviser is registered as an investment adviser in the state where the state investment adviser has its principal place of business and is in compliance with that state's requirements relating to accounts and records."]. That was a NSMIA requirement; NSMIA said the records and financial requirements of state investment advisers would be determined only by the state in which the state investment advisers are domiciled. Other states could not impose greater restrictions. Number 0265 CHAIRMAN ROKEBERG referred to pages 33 and 34, subsection (5), "(5) the administrator shall consider that a state [AN] investment adviser is not necessarily qualified solely on the basis of experience as a broker-dealer or agent; if [WHEN] the administrator finds that an applicant for initial or renewal registration as a broker-dealer is not qualified as a state [AN] investment adviser, the administrator may by order condition the applicant's registration as a broker-dealer upon the applicant's not transacting business in this state as a state [AN] investment adviser;". He questioned that one could become a broker-dealer and not be a state investment adviser if not proven to be qualified. He confirmed from Mr. Elder that in current law one could sell stocks without being a financial planner. MR. ELDER clarified that section was saying that being a broker-dealer was not automatic qualification for being an investment adviser, indicating in this case it had to be limited to state investment adviser. He confirmed this was to make sure the person in question had the background to be an investment adviser. Mr. Elder noted most of the broker-dealers were large enough so that their associated advisers were federal covered advisers, not state investment advisers. Therefore this did not really apply to anyone and he thought it had never been acted on. Number 0341 CHAIRMAN ROKEBERG referred to the reference on page 36 to the United States Securities and Exchange Commission's Form D, indicating it was unusual to mention a specific form name in statutory construction. He questioned how long the form had been in existence. Number 0359 MR. ELDER answered he did not know exactly, but said a long time, as long as Regulation D had been in existence. NSMIA requires that states can only require what is filed with the SEC for Regulation D 506 filings which are considered covered securities, and Form D is what is filed with the SEC. He assured the chairman it was unlikely Form D would cease to exist. CHAIRMAN ROKEBERG referred to page 36, lines 27 and 28 [and line 29], "(B) the issuer and predecessor during the past three fiscal years have had average net earnings, determined in accordance with generally accepted accounting practices", questioning the inclusion of "GAP" principals and average net earnings. Number 0453 MR. ELDER replied several places in the "Securities Act" required "GAP" accounting. He clarified the "GAP" would be for the earnings and then the net earnings would be averaged over three years. CHAIRMAN ROKEBERG referred to page 38, in Section 37, regarding a person filing a registration statement or a notice filing, asking what the notice filing fee was. Number 0507 MR. ELDER replied the fee would be set by regulation, noting in the past they just had a registration fee, and now they were required to have both a notice filing fee and a registration fee. He stated both the current fees were .1 percent of the amount being either registered or noticed, with a minimum of $100 and a maximum of $3000. Mr. Elder replied to the chairman that he didn't know why there was a maximum amount but indicated he would be surprised if anyone ever sold to that amount. CHAIRMAN ROKEBERG asked for clarification regarding the automatic extension on page 39 [lines 19 through 24: "The administrator may establish a different expiration date for purposes of coordination with a national registration or notice filing system. The administrator may by regulation provide for an automatic extension for one additional year of the effective date for notice filings under AS 45.55.075 if the extended expiration date is set at the same time the notice filing is made effective and the notice filing fee reflects the extension."]. Number 0586 MR. ELDER agreed that the extension was requested and paid for in the initial filing, explaining it was for simplification. Standard practice was for orders of effectiveness to be for a one-year period but an additional year extension was allowed and a slight fee discount given at the time of filing. For example, currently mutual funds have two-year notices and the division anticipates the industry would want to do that, but, especially with the change to a flat fee, it was also possible that a new fund would be registered for one year "to test the waters." Mr. Elder responded to the chairman's question regarding why the bank holding company equities, on page 43, had to be treated differently. He stated that entire section was making some updates to the exemption of their statute, and he indicated these changes were updates in response to changes in the "Uniform Securities Act." CHAIRMAN ROKEBERG noted the .900 sections of chapters in the Alaska Statutes contained the exemptions. He confirmed the exemption on page 44 was an exemption for real estate obligations. Number 0759 MR. ELDER referred to previous testimony regarding the sale of a person's home [in relation to viatical settlements], commenting the committee would note the exemption from the Alaska Securities Act was for selling a home with the entire mortgage or deed of trust, bonds and other evidence of indebtedness, as a unit. The exemption would not cover the sale if a person sold it in fractional shares or interests; the person would probably receive a letter from the division. CHAIRMAN ROKEBERG indicated that commercial and residential mortgages are now "securitized" and fractionalized with CMOs [collateralized mortgage obligations] and other sophisticated securities instruments. He asked how that section worked with, for example, a CMO. Number 0837 MR. ELDER responded they would not qualify for this exemption, not if they were selling interests in a pool. He indicated they would be required to register, unless they fit under another exemption, for example, guaranteed by some political subdivision or similar. Mr. Elder confirmed limited partnerships on page 45 were included in the definition of a security. In response to the chairman's discussion of the 25-person limit and its relevance to the formation of real estate syndicates in Alaska, Mr. Elder noted he did not know why 25 had been chosen for Alaska. As far as private offerings, 10 or 25 was not unusual for other states. 25 may have been selected because it had something to do with the number of persons in a partnership. CHAIRMAN ROKEBERG noted with 25 people each contributing $100,000, $2.5 million could be raised, critical mass in terms of a syndication or investment. Number 0941 MR. ELDER stated the dollar limit was the total dollar limit, not the individual limit; currently $100,000 maximum for AS 45.55.900(b)(5)(A) and $500,00 maximum for AS 45.55.900(b)(5)(B). He noted they were proposing to do away with those limits, confirming an unlimited amount of money could be raised with limited numbers of people. Mr. Elder stated they thought it was pro-commerce. He emphasized these were private offerings in the (b)(5) section, not public solicitations. CHAIRMAN ROKEBERG asked how this worked regarding notification. Number 1054 MR. ELDER explained some exemptions in 45.55.900 were self-executing, not requiring notice, and others did require a notice to the state. The current notice format was a letter to the state giving notice plus a $40 fee. However, the division was developing simple forms that could be downloaded from the Internet for standardization and faster processing. CHAIRMAN ROKEBERG asked why subsection (v), "(v) [(vi)] the issuer obtains a signed agreement from the buyer acknowledging that the buyer is buying for investment purposes and that the securities will not be resold without registration under this chapter;", had been excluded from subsection (b)(5)(C) on page 46, "(C) to no more than 10 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 the requirements of (B)(ii) - (iv) and (vi) of this paragraph are met;". Number 1177 MR. ELDER mentioned the committee's past discussion on HB 486, noting the section in question was part of the amendments to various titles supported by those attempting to improve Alaska's standing for trust business. He indicated it is a limited offering and technically those are securities; this is to provide them an exemption from registration. However, the division suggested that some of AS 45.55.900(b)(5)(B)'s requirements be maintained for the public good, while still facilitating the trust business. He noted this was acceptable to those promoting these amendments. Mr. Elder noted (b)(5)(B)(i), "(i) a [NO] commission or other remuneration in not paid or given directly or indirectly for soliciting a prospective buyer in this state;", was also excluded because some of the trust beneficiaries are in other states. Regarding (v), he commented it was not easy to get a signed agreement and a signed agreement did not have any real meaning in this case. Those kinds of interests - beneficiary of trust proceeds, et cetera - were generally not something being bought. He indicated they thought the inclusions of (ii) through (iv), and (vi), were sufficient to provide public protection. CHAIRMAN ROKEBERG asked what a promoter was, noting discussion the previous year. Number 1327 MR. ELDER stated it was currently defined in regulation and that definition would be updated in regulation. A promoter is essentially anyone who causes a business to be started and that stock to be issued, often a controlling figure and often receiving the first distribution of stock. Currently the "isolated nonissuer transaction" language in AS 45.55.900(b)(9) has caused some confusion. Mr. Elder indicated the division has always maintained that when someone is a controlling person there is no difference between that person and a corporation - especially in some cases where the person may have 80 percent of the shares - and that person cannot use the exemption in (b)(9) to distribute. He noted would be particularly important in light of the new (b)(5)(C) exemption; if the restriction on promoters was not clear in (b)(9), those people could use (b)(5)(C) to distribute to the public. This would also be a public distribution that had never had a registration or disclosure. CHAIRMAN ROKEBERG referred to the deletions from the current law of subsections (b)(13)(A) and (b)(13)(B), mentioning competing. [deleted language: "[,IF] (A) {NO COMMISSION OR OTHER REMUNERATION, OTHER THAN A STANDBY COMMISSION IS PAID OR GIVEN DIRECTLY OR INDIRECTLY FOR SOLICITING A SECURITY HOLDER IN THIS STATE; AND (B) THE ISSUER FILES A NOTICE IN THE FORM SPECIFIED BY THE ADMINISTRATOR NOT LESS THAN 30 DAYS BEFORE MAKING THE OFFER];"] Number 1456 MR. ELDER answered in the affirmative, noting they didn't receive very many of these because they were often covered by other exemptions, or were covered securities and therefore not part of the filing requirements. This deletion would make the few the division still received self-executing exemptions, eliminating the notice requirement. In response to the chairman's question about the new subsection (b)(17) on page 50, Mr. Elder noted (17) was a replacement for the current subsection (b)(10) which was always referred to as a manual exemption: certain transactions are exempted when certain information is out there. He commented it was very dated and required the division to adopt regulations naming specific publications the information was found in. NASAA developed this replacement language working with the securities industry association. If the information is available for SEC download, that is now sufficient. CHAIRMAN ROKEBERG questioned why unit investment trusts, appearing on page 50, line 13 and page 51, line 22, were involved. Number 1678 MR. ELDER noted NASAA had drafted the language and suggested it was in order to be all-inclusive. He emphasized these were non-issuer transactions, secondary transactions, not the initial distribution. Recognizing that unit investment trusts are very common, he noted it was including them, not excluding them, and this was an exemption for secondary transactions, like the current (b)(10). CHAIRMAN ROKEBERG asked what the manuals mentioned in subsection (D), page 50, line 27 had to do with this Number 1754 MR. ELDER clarified there were certain manuals, as mentioned in (b)(10), which contain information on earnings, balance sheet statements, et cetera. Secondary transactions have been mainly exempt because the information is in one of those manuals, but the manuals have had to be specifically named, which has been a problem. Mr. Elder indicated (b)(17)(D) recognizes that the information may be in one of those manuals but it also may be in SEC filings and available through EDGAR [Electronic Data Gathering, Analysis, and Retrieval system], the SEC reporting system. CHAIRMAN ROKEBERG questioned whether subsection (18) on page 51 was creating a new type of security. Number 1848 MR. ELDER stated it was not a new type of security, it was a new type of exemption. The language had been drafted by NASAA and this subsection was called the accredited investor exemption. Essentially it provides for the ability of issuers that meet the criteria to simply send the division a notice after a transaction has been made, as opposed to advance registration. The purpose of this was to exempt an issuer from registration when the issuer was issuing in order to obtain expansion money and was willing to limit its solicitation to investors who meet the SEC's accredited investor definition. Mr. Elder said this accredited investor exemption and the Internet offer exemption, in (g) on page 55, line 10, would allow Alaska issuers to participate in the Small Business Administration's (SBA) ACE-Net [Angel Capital Electronic Network] program, an electronic matching service. Issuers meeting the criteria in this exemption and investors meeting the accredited investor definition could both get listed on ACE-Net, review each other and possibly make agreements. If something was done, Mr. Elder said the Alaska businesses would send the division a notice to that effect. He referred to page 54, line 26, (I), "(I) the issuer shall file a notice 15 days after the first sale in this state;". If there are no sales, no notices are filed. CHAIRMAN ROKEBERG referred to Section 47 of the bill, on page 55, noting the language in subsection (g) seemed to say securities could not be offered to Alaskans, only to those out of state. Number 2099 MR. ELDER noted this language was drafted by NASAA for the "Uniform Securities Act" in recognition that the Internet was not covered in most states' past statutes. Before the Internet, one could not make an offer of a security unless it was registered or exempt. However, with the creation of a website, "hits" can be received from anyone and the technical argument can be made that the holder of the website, typically an issuer, has made an offer. If the holder is not registered in a state where a hit was received from, the holder has just violated that state's securities Act. He explained this exemption allows the website as long the states where the holder is registered, or not registered, are clearly noted, keeping the holder from being in violation of the securities Act from the beginning. Mr. Elder indicated sales could not be made until the seller was registered in the buyer's state. Number 2396 CHAIRMAN ROKEBERG indicated the committee was nearing the close of the meeting but was waiting for a quorum to address amendments on viatical settlements and dual agency. He asked Mr. Elder about the change from 6 percent to 8 percent, "or the fixed rate, 'cause it was higher?" [No bill section mentioned.] Number 2470 MR. ELDER stated, "The idea there is that we've been at six for a long time and we thought that in fact -- this is dealing with recision offers, and so we think ... it ought to be somewhat of a punitive rate, so it should be something higher than the..." [TESTIMONY INTERRUPTED BY TAPE CHANGE] TAPE 99-11, SIDE B Number 0001 CHAIRMAN ROKEBERG referred to page 69, Sections 74 to 77, which includes a substantial amount of repealers. He indicated the need for an explanation of those repealers. Number 0088 MR. ELDER said that inquiry regarding Sections 74 to 76 would best be directed to Terry Bannister, Legislative Legal Counsel, Legislative Legal and Research Services, Legislative Affairs Agency. Mr. Elder noted the repealers came from legislative counsel. CHAIRMAN ROKEBERG referred to Sections 75 and 76. MR. ELDER said, "And on Section 72, those repealers are simply because there -- like I know that 996 [AS 45.55.990(6)], for instance, is the old definition of investment adviser. And 020(b)[AS 45.55020(b)] I'd have to look." CHAIRMAN ROKEBERG suggested that Mr. Elder's earlier reference to legislative counsel should be to legislative legal because, "we have a Legislative Council as a group." There being no further questions for Mr. Elder, Chairman Rokeberg said he would entertain some conceptual amendments to HB 83 regarding the removal of all references to "viatical settlements" in Version D. Number 0256 REPRESENTATIVE HALCRO moved that all references to "viatical settlements" be deleted, as a conceptual amendment. There being no objection, the conceptual amendment was adopted. Number 0312 CHAIRMAN ROKEBERG indicated the need for a conceptual amendment to define "dual agency." Number 0333 REPRESENTATIVE HALCRO moved that a conceptual amendment defining "dual agency" be adopted. There being no objection, the conceptual amendment was adopted. Number 0359 REPRESENTATIVE CISSNA indicated a letter from the National Planning Corporation in the bill packet asked for the definition of "disclosure" to be included in HB 83 for the average consumer. REPRESENTATIVE HARRIS asked if the definition of "disclosure" was in HB 83. Number 0418 MR. ELDER stated that definition is not included in HB 83 but they had noted that suggestion. Including that disclosure definition is probably not necessary because "disclosure" is simply telling someone something either in writing or verbally. He stated the division would not object to creating a definition of "disclosure." CHAIRMAN ROKEBERG asked what "disclosure" would mean in the context of HB 83. Number 0542 MR. ELDER reiterated his former definition of "disclosure" which he thought would be a simple dictionary definition that does not need to be defined in the bill. In response to Chairman Rokeberg, Mr. Elder did not have any corrections or additions to HB 83, noting they were very pleased with the drafting. Mr. Elder noted that his staff had found a definition for "dual agency" in "SEC Rule 10-b-10." He agreed to provide that information to the committee. Mr. Elder asked if the committee desired a definition for unreasonable hours for telephone. CHAIRMAN ROKEBERG asked if the unreasonable hours for telephone was included in the conduct rules of the National Association of Securities Dealers, Incorporated (NASD). MR. ELDER said that the specific rule citation under NASD could be included. Number 0639 CHAIRMAN ROKEBERG referred to page 17, line 23 and asked what "conducting business by telephone at unreasonable times" meant. MR. ELDER suggested inserting the following language: "in violation of Rule 22-11 of the National Association of Securities Dealers." He indicated that rule determines the time for conducting business. CHAIRMAN ROKEBERG suggested the following conceptual amendment: insert "as defined by the Conduct Rules of the National Association of Securities Dealers, Inc." at the end of line 23 on page 17. MR. ELDER said that would be fine. Number 0713 REPRESENTATIVE HARRIS asked if that would be duplication. CHAIRMAN ROKEBERG said he had the same thought since subsection (28) addressed the conduct rules. Chairman Rokeberg concluded that an amendment would not be necessary. [HB 83 WAS HELD OVER] ADJOURNMENT Number 0755 CHAIRMAN ROKEBERG adjourned the House Labor and Commerce Standing Committee meeting at 5:10 p.m.