Legislature(2015 - 2016)BARNES 124

02/01/2016 03:15 PM LABOR & COMMERCE

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Audio Topic
03:19:07 PM Start
03:19:21 PM HB194
04:13:01 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
        HB 194-AK SECURITIES ACT; PENALTIES; CRT. RULES                                                                     
                [Contains discussion of SB 108]                                                                                 
3:19:21 PM                                                                                                                    
CHAIR OLSON  announced that the  only order of business  would be                                                               
HOUSE BILL NO.  194, "An Act repealing and  reenacting the Alaska                                                               
Securities   Act,  including   provisions   relating  to   exempt                                                               
securities   and  transactions;   relating  to   registration  of                                                               
securities, firms, and  agents that offer or  sell securities and                                                               
investment  advice;   relating  to  administrative,   civil,  and                                                               
criminal enforcement provisions,  including restitution and civil                                                               
penalties for violations; allowing  certain civil penalties to be                                                               
used for an investor training  fund; establishing increased civil                                                               
penalties  for  harming   older  Alaskans;  retaining  provisions                                                               
concerning corporations organized under  the Alaska Native Claims                                                               
Settlement  Act; amending  Rules 4,  5,  54, 65,  and 90,  Alaska                                                               
Rules of Civil Procedure; and providing for an effective date."                                                                 
3:19:54 PM                                                                                                                    
KEVIN  ANSELM, Director,  Anchorage Office,  Division of  Banking                                                               
and  Securities, Department  of  Commerce,  Community &  Economic                                                               
Development  (DCCED),  informed the  committee  HB  194 seeks  to                                                               
update the  Alaska Securities Act.   She noted  that supplemental                                                               
documents  included in  the committee  packet  are:   a table  of                                                               
contents  that  is  a  guide  to the  bill  and  its  substantive                                                               
changes; a draft  of the [Alaska Native Claims  Settlement Act of                                                               
1972  (ANCSA)] Alaska  Native Claims  Settlement Act  Corporation                                                               
Proxy Solicitations which  is the part of  the current securities                                                               
Act that  will remain in  AS 45.55; and a  securities enforcement                                                               
comparison that  reveals the differences between  civil penalties                                                               
under  current law  and  the proposed  legislation.   Ms.  Anselm                                                               
directed  attention   to  a  PowerPoint   presentation  entitled,                                                               
"Updating the  Alaska Securities Act  HB 194," dated  2/1/16, and                                                               
explained  the   reasons  to  update  the   securities  Act  are:                                                               
recognize and  incorporate current industry terms  and standards,                                                               
which has not  been done since 1999; synthesize with  the laws in                                                               
other states  to assist businesses, entrepreneurs,  and investors                                                               
to understand  their rights, responsibilities,  and opportunities                                                               
in Alaska; consider opening  equity crowdfunding opportunities to                                                               
Alaskans;  deter  investment  scams   using  Alaska  entities  or                                                               
harming  Alaskans; enhance  penalties  for those  who harm  older                                                               
Alaskans; separate  the securities  statutes from  ANCSA statutes                                                               
to  reduce  confusion and  improve  understanding  for both  Acts                                                               
[slide 2].  At this time,  the Alaska Securities Act provides the                                                               
legal framework for offering or  selling securities within Alaska                                                               
or to  Alaskans, including requirements  for the  registration of                                                               
various types of securities,  requires business plan disclosures,                                                               
and   provides   for    exemption   from   certain   registration                                                               
requirements.   The  Act also  requires the  registration of  the                                                               
sales force  that sells securities  to Alaskans;  and enforcement                                                               
[slide 3].   The ANCSA  provisions remaining in AS  45.55 include                                                               
references to  exempt ANCSA securities transactions  currently in                                                               
AS  [45.56.210],  and  enforcement  and  administration  of  this                                                               
chapter.    Ms.  Anselm  said   all  other  references  that  are                                                               
confusing  to  ANCSA  shareholders  and to  others,  are  removed                                                               
[slide 4].                                                                                                                      
REPRESENTATIVE  JOSEPHSON asked  for clarification  of provisions                                                               
related to ANCSA.                                                                                                               
MS.  ANSELM explained  that the  current  Act references  stocks,                                                               
bonds,  and other  securities  that have  no  relevance to  ANCSA                                                               
REPRESENTATIVE  LEDOUX asked  whether  the  only remaining  ANCSA                                                               
provisions are related to proxies.                                                                                              
MS.   ANSELM  said   no.     She   directed   attention  to   the                                                               
aforementioned document  found in the committee  packet entitled,                                                               
"Draft - Chapter 45.55 upon  effectiveness of HB 194/SB 108," and                                                               
pointed  out   that  also  included   are  sections   related  to                                                               
misleading filings,  reports of corporations,  and administration                                                               
of the chapter.   She said, "And  so it has been  modified to fit                                                               
only the ANCSA  corporations and not all of  the other securities                                                               
REPRESENTATIVE LEDOUX asked:                                                                                                    
     If  somebody is  subject to  the [U.S.]  Securities and                                                                    
     Exchange  Commission, are  they  still  subject to  the                                                                    
     Alaska securities  law or is this  special for entities                                                                    
     that  are not  subject to  ... the  federal [Securities                                                                    
     Exchange Act]?                                                                                                             
MS. ANSELM  advised there are certain  federal-covered securities                                                               
and  activities  over  which  the state  has  no  authority;  the                                                               
National Securities Markets Improvement Act  of 1996 took some of                                                               
the  registration of  securities responsibilities  away from  the                                                               
state, although  all broker-dealers  and salespersons  must still                                                               
be licensed  in the state.   In fact, there is  a dual regulatory                                                               
system:  the  U.S. Securities and Exchange  Commission (SEC), and                                                               
a   self-regulatory   organization,    the   Financial   Industry                                                               
Regulatory  Authority (FINRA).   She  further explained  that SEC                                                               
oversees investment advisors who  handle accounts of $100 million                                                               
or more,  and "anything  under a hundred  million dollars  is the                                                               
state's  responsibility."     Crowdfunding  intrastate  is  state                                                               
regulated, however,  crowdfunding crossing state borders  will be                                                               
under  the  jurisdiction  of  SEC when  available.    Ms.  Anselm                                                               
offered  to  provide a  graph  illustrating  state, federal,  and                                                               
shared responsibilities.   She stated  that ANCSA  provisions are                                                               
specific to Alaska  and suggested the committee  review the draft                                                               
document that was provided.                                                                                                     
3:29:02 PM                                                                                                                    
MS. ANSELM,  returning to the benefits  of HB 194, said  the bill                                                               
would  improve  organization  of   topics,  would  be  easier  to                                                               
understand, and  would eliminate filings for  all exemptions from                                                               
registration,  except rescission  offers  and  crowdfunding.   In                                                               
addition,  the  bill  updates  entity  and  law  references,  and                                                               
includes bad actor disqualifiers.                                                                                               
REPRESENTATIVE   LEDOUX  questioned   whether   bad  actors   are                                                               
forbidden forever.                                                                                                              
MS.  ANSELM  was  unsure,  and said  she  would  provide  further                                                               
information.     Finally,  the  bill  improves   enforcement  and                                                               
investor education  provisions [slides 5  and 6].   She continued                                                               
with  an overview  of  HB 194:   Articles  1  through 7  [further                                                               
discussion follows] [slide 7].   Article 1, Sections 2 through 35                                                               
cover all of the changes that need  to be made to the other laws,                                                               
and the  changes to  ANCSA provisions  in AS  45.55.   Ms. Anselm                                                               
advised that the first provision in  the law is that a person may                                                               
not  offer  or sell  a  security  in the  state  unless  it is  a                                                               
federally-covered security,  the person is registered  under this                                                               
chapter,  or  the  security  or   transaction  is  exempted  from                                                               
registration  [slide   8].    She   directed  attention   to  the                                                               
aforementioned document  found in the committee  packet entitled,                                                               
"Comparison of  SB 108/HB  94 to  Existing Alaska  Securities Act                                                               
(AS 45.55)," and described how to  use the document to search for                                                               
information  related to  HB 194.    Article 2  includes the  same                                                               
registration and transactional exemptions  as the current Act and                                                               
adds  a crowdfunding  exemption, also  known as  small intrastate                                                               
securities offerings.   Equity,  or debt, crowdfunding  allows an                                                               
investor  to invest  in  a  business and  share  in its  earnings                                                               
[slide  9].    Provisions  of  crowdfunding  in  Alaska  include:                                                               
issuer  must be  an Alaska  business; purchasers  must be  Alaska                                                               
residents; and  issuer must have some  evidence proving residency                                                               
[slide 10].   The bill  differs from other forms  of crowdfunding                                                               
in that an Alaskan investor can profit from the business.                                                                       
3:36:28 PM                                                                                                                    
REPRESENTATIVE  LEDOUX  gave  an  example of  a  group  that  was                                                               
soliciting funds  to open a  brewery and asked whether  that type                                                               
of activity is subject to Alaska securities laws.                                                                               
MS. ANSELM  responded yes and  no.   If investors in  the brewery                                                               
did  not expect  a return,  the transaction  would not  have been                                                               
subject to  the Alaska  Security Act; however,  up to  25 friends                                                               
and family  could invest after  an exemption to the  security Act                                                               
was filed.   In  further response  to Representative  LeDoux, she                                                               
said the  friends and family  exemption is not  being eliminated,                                                               
but the filing  and fees for a friends and  family exemption will                                                               
no longer be required.                                                                                                          
MS. ANSELM  returned to  the topic of  crowdfunding, and  said no                                                               
commission can  be paid  unless the  salespeople are  licensed in                                                               
Alaska,  notice filings  are required  under certain  time limits                                                               
and provide  pertinent information, and the  issuer cannot resell                                                               
unless the securities are exempt  or are registered.  Crowdfunded                                                               
securities are illiquid [page 10].                                                                                              
REPRESENTATIVE  LEDOUX  asked  whether the  proposed  legislation                                                               
affects "buying into a business" and she gave an example.                                                                       
MS.  ANSELM stated  investors  buying into  a  business could  be                                                               
subject,  if  there were  a  general  solicitation.   In  further                                                               
response to Representative LeDoux,  she answered that friends and                                                               
family can sell their interest  only if the security is otherwise                                                               
exempt or registered.   She further clarified that  a security is                                                               
similar to a property title:   proper paperwork and a clean title                                                               
is necessary to allow a business to be transferred or sold.                                                                     
3:42:09 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON  recalled  there was  a  previous  bill                                                               
related to securities exemptions.                                                                                               
MS.  ANSELM offered  to provide  information on  previous related                                                               
legislation.   She then  directed attention  to Article  4, which                                                               
improved   licensing  provisions,   added   a  new   registration                                                               
exemption  for  mergers  and acquisitions  brokers  in  order  to                                                               
promote  business within  the state,  and added  a new  exemption                                                               
also for "snowbirds" with two residences [slide 11].                                                                            
REPRESENTATIVE  LEDOUX stated  that one  who has  a residence  in                                                               
Arizona,  and who  wanted to  purchase stock  from Alaska,  would                                                               
have to have a broker licensed in both states.                                                                                  
MS. ANSELM  said yes,  unless other exemptions  apply, or  if the                                                               
other state  has reciprocal agreements.   In further  response to                                                               
Representative LeDoux,  she said the state  has jurisdiction over                                                               
salespersons living  in the  state, and  SEC oversees  the firms.                                                               
For a  transaction within a state  without reciprocal agreements,                                                               
she suggested that  de minimis exemptions may apply  in a certain                                                               
number of cases.                                                                                                                
3:47:45 PM                                                                                                                    
REPRESENTATIVE HUGHES inquired as  to why reciprocity is required                                                               
from both  of the states  involved in  order for a  former Alaska                                                               
resident to acquire an exemption.                                                                                               
MS.  ANSELM advised  that a  number of  provisions need  to apply                                                               
such  as  whether  both  states  have  jurisdiction  in  case  of                                                               
wrongdoing,  and that  there is  no problem  with the  investors'                                                               
rights.    She  added  that  this is  a  Uniform  Securities  Act                                                               
provision  and her  division would  provide  more information  in                                                               
this regard.                                                                                                                    
3:50:39 PM                                                                                                                    
CHAIR OLSON requested that Ms.  Anselm provide the information to                                                               
committee staff for distribution.                                                                                               
MS. ANSELM  directed attention  to Article  6, which  permits the                                                               
division to develop and  implement investor education initiatives                                                               
through collaboration and also to  accept grants or donations for                                                               
that specific  purpose.  Additionally  there is an  initiative to                                                               
establish  an investor  education  fund, using  one-third of  the                                                               
money received  in civil penalties; however,  the legislature can                                                               
appropriate  these  funds for  investor  training,  or for  other                                                               
purposes.    The final  administrative  change  is that  variable                                                               
annuity transactions will be subject  to applicable provisions of                                                               
the  securities Act  such as  sales  practices, although  concern                                                               
about  this  provision  has  been   expressed  by  the  insurance                                                               
industry  [slide 12].   Regarding  enforcement, basic  provisions                                                               
are  carried over  from the  current laws,  but the  language has                                                               
been  reorganized   and  expanded,  including   increasing  civil                                                               
penalties up  to $100,000 per  violation - with no  maximum limit                                                               
per case  - and treble damages  when the victim is  over 60 years                                                               
of age [slide 13].                                                                                                              
REPRESENTATIVE  LEDOUX asked  whether  the penalty  for a  single                                                               
violation could be $100,000.                                                                                                    
MS. ANSLEM  gave an example  of a group  of Alaskans who  lost $3                                                               
million to  an oil and  gas scam.   Currently, the  maximum civil                                                               
penalty that could be charged for  all of the civil violations in                                                               
that  case  is $25,000;  in  further  response to  Representative                                                               
LeDoux,  she said  that HB  194 would  possibly allow  a $100,000                                                               
penalty  for each  count  in a  case, and  the  maximum would  be                                                               
$100,000 against one person in one case.                                                                                        
3:56:14 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON  inquired  as  to how  the  bill  could                                                               
educate, or be a deterrent to bad conduct.                                                                                      
MS.  ANSELM opined  increased penalties  are a  deterrent because                                                               
they  raise  "a  cost  of doing  business"  beyond  the  previous                                                               
maximum  exposure  of  a  $25,000 penalty,  no  matter  how  many                                                               
millions  of dollars  were  stolen.   She  returned attention  to                                                               
significant  enforcement  changes  in   HB  194  and  noted  that                                                               
restitution may be ordered by  the division as administrator, and                                                               
there is  a provision that superior  court can hold a  person who                                                               
is  in  violation  of  a  final  administrative  order  in  civil                                                               
contempt, and subject to a  potential $100,000 fine per violation                                                               
[slide 14].                                                                                                                     
REPRESENTATIVE  JOSEPHSON  observed  that  currently,  one  seeks                                                               
restitution by suit, unaided by the government.                                                                                 
MS. ANSELM  explained there is an  administrative process wherein                                                               
if  one does  not  agree with  an order  from  the division,  the                                                               
matter goes to the Office  of Administrative Hearings, Department                                                               
of Administration, and then through the court system.                                                                           
REPRESENTATIVE  LEDOUX  inquired  as  to whether  the  amount  of                                                               
restitution can be equal to the amount that was lost.                                                                           
MS.  ANSELM said  absolutely.   She  continued the  presentation,                                                               
advising  that  the  following   significant  changes  have  been                                                               
proposed to  civil enforcement:   injunctions; asset  freezes and                                                               
receivership; additional  penalties where the victim  is an older                                                               
Alaskan; order  of rescission  or disgorgement;  restitution; and                                                               
repayment of  prejudgment or post-judgement interest  [slide 15].                                                               
Ms.  Anselm   turned  to  civil  liability,   advising  the  bill                                                               
separates civil liability from rescission  - which is when a sale                                                               
or purchase  of a  stock or  bond was a  violation and  should be                                                               
rescinded.    Other  circumstances include  when  salespeople  in                                                               
violation  are  liable to  their  clients;  in these  cases,  the                                                               
statute of limitations is generally  three years from the date of                                                               
sale, unless there is fraud.                                                                                                    
CHAIR OLSON  recalled a federal  case in Anchorage and  asked how                                                               
the proposed changes in HB  194 would have affected the penalties                                                               
assessed in that case.                                                                                                          
MS.  ANSELM  said  she  would  provide  that  information.    She                                                               
continued, in  HB 194, rescission  offers are generally  the same                                                               
except  for the  following: an  aggrieved  party has  30 days  to                                                               
accept  a  rescission offer;  the  offeror  must demonstrate  the                                                               
ability to  pay; the recession offer  must be delivered in  a way                                                               
that  ensures  receipt; and  the  offeror  must actually  pay  as                                                               
promised   [slide   17].      Regarding   criminal   enforcement,                                                               
significant changes are that  "knowing violations" are considered                                                               
a  class  C  felony,  and   a  violation  of  securities  law  is                                                               
considered a class A misdemeanor in a criminal prosecution.                                                                     
4:03:48 PM                                                                                                                    
CHAIR OLSON asked when the CS for HB 194 would be finalized.                                                                    
MS.  ANSELM expressed  her understanding  that the  division will                                                               
finalize  the  CS  as  soon  as possible,  and  will  present  no                                                               
material  changes.   In  further  response  to Chair  Olson,  she                                                               
stated that she will notify the chair of changes on [2/2/16].                                                                   
REPRESENTATIVE LEDOUX  directed attention to the  proposed CS for                                                               
HB 194, labeled  29-GH1060\W, on page 34,  [paragraph (12)] which                                                               
     (12) a  description of any pending  litigation, action,                                                                    
     or proceeding to  which the issuer is a  party and that                                                                    
     materially affects the issuer's  business or assets and                                                                    
     any  litigation,  action,  or proceeding  known  to  be                                                                    
     contemplated by governmental authorities;                                                                                  
REPRESENTATIVE LEDOUX  questioned why the foregoing  provision is                                                               
limited  to an  action  contemplated  by government  authorities,                                                               
rather than litigation  that "is contemplated by  anybody ... so,                                                               
for example,  if you've gotten  a demand letter from  an attorney                                                               
or a private party ...."                                                                                                        
MS.  ANSELM  said  she  was  unsure.    In  further  response  to                                                               
Representative  LeDoux   on  her  question  as   to  whether  the                                                               
foregoing  provision applies  to  a formal  litigation action  or                                                               
proceeding, she suggested changes may  be made by regulation, and                                                               
that she would review Version W.                                                                                                
REPRESENTATIVE JOSEPHSON  asked for the  source of the  ideas for                                                               
the bill.                                                                                                                       
MS. ANSELM  responded that  the division  looked at  the [Uniform                                                               
Securities   Act   (USA)]  for   ways   to   provide  relief   to                                                               
entrepreneurs and businesses, while  still protecting the public.                                                               
Some   ideas   came   from    the   North   American   Securities                                                               
Administrators Association, such as  more protection for seniors.                                                               
Also,  experiences  with enforcement  and  that  the division  is                                                               
unable to  deter activities  in Alaska and  by entities  based in                                                               
Alaska.   She  stated  the division  sought  to maintain  Alaska-                                                               
centric provisions  in the current  law, and also  to incorporate                                                               
other benefits from the Uniform Securities Act and elsewhere.                                                                   
4:11:08 PM                                                                                                                    
CHAIR OLSON noted HB 194 has a zero fiscal note, and opined the                                                                 
bill is long overdue.                                                                                                           
MS. ANSELM said she welcomed inquiries.                                                                                         
[HB 194 was held over.]                                                                                                         

Document Name Date/Time Subjects
HB194 Fiscal Note-DCCED-DBS-01-25-16.pdf HL&C 2/1/2016 3:15:00 PM
HB 194
HB194 Supporting Documents-Crosswalk.pdf HL&C 2/1/2016 3:15:00 PM
HB 194
HB194 Supporting Documents-Draft Chapter AS.44.55.pdf HL&C 2/1/2016 3:15:00 PM
HB 194
HB194 Supporting Documents-DBS Presentation.pdf HL&C 2/1/2016 3:15:00 PM
HB 194
HB194 Supporting Documents-Enforcement Comparison.pdf HL&C 2/1/2016 3:15:00 PM
HB 194
HB194 Supporting Documents-Table of Contents.pdf HL&C 2/1/2016 3:15:00 PM
HB 194
HB194 Ver A.PDF HL&C 2/1/2016 3:15:00 PM
HB 194
HB194 Transmittal Letter.pdf HL&C 2/1/2016 3:15:00 PM
HB 194
HB194 Sectional Analysis.pdf HL&C 2/1/2016 3:15:00 PM
HB 194
HB194 Draft Proposed Blank CS ver W.pdf HL&C 2/1/2016 3:15:00 PM
HB 194
HB194 Legal Services Memo CS ver W.pdf HL&C 2/1/2016 3:15:00 PM
HB 194