Legislature(2015 - 2016)BARNES 124
03/14/2016 03:15 PM LABOR & COMMERCE
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HB 194-AK SECURITIES ACT; PENALTIES; CRT. RULES 4:07:16 PM CHAIR OLSON announced that the next 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." 4:07:53 PM REPRESENTATIVE HUGHES moved to adopt the proposed committee substitute (CS) for HB 194, labeled 29-GH1060\E, Bannister, 3/11/16 as the working document. There being no objection, Version E was before the committee. 4:08:12 PM KEVIN ANSELM, Director, Division of Banking and Securities, Anchorage Office, Department of Commerce, Community & Economic Development, said she would discuss the changes to HB 194. 4:09:54 PM The committee took an at ease from 4:09 p.m. to 4:10 p.m. 4:10:49 PM MS. ANSELM paraphrased from the following brief sectional analysis for the proposed CS for HB 194, Version E [original punctuation provided]: SECTIONS 1 - 14 (pp. 1-11) include the corresponding changes to statutes that refer to former AS 45.55 provisions that have been moved to AS 45.56. SECTIONS 15 - 24 (pp. 11-24) modify AS 45.55 as necessary to delete references to statutes that have no bearing on the Alaska Native Claims Settlement Act corporations because of the enactment of AS 45.56. SECTION 25 (p. 14) Proposed new Chapter AS 45.56 Article 1. General Provisions (pp. 14-15) Sec. 45.56.105. Securities registration requirement - same as current law (AS 45.55.070). Securities must be registered before offer or sale unless federally covered or specifically exempt from registration. Article 2. Exemptions from Registration of Securities (pp. 15-29) Sec. 45.56.205. Exempt securities - generally the same as current law (AS 45.55.900(a)) with a few additions including securities issued by an insurance company; certain options, warrants and rights that are not federal covered securities; certain cooperatives and equipment trust certificates. Sec. 45.56.210. Exempt transactions - similar to current law AS 45.55.900(b), reorganized with additions reflecting transactions allowed under the Uniform Securities Act of 2002 (USA). Sec. 45.56.220. Small intrastate securities offerings (referred to as "Crowdfunding") Allows Alaskans to invest up to $5,000 per person, per offering, in an Alaskan business. Businesses can raise up to $1 million per offering and requires a notice filing with the state and certain investor disclosures and protections. Sec. 45.56.230. Disqualifier - prohibits persons who have been subject to regulatory action or participated in certain crimes from using the available exemptions from the registration requirement. Sec. 45.56.240. Waiver and modification - broadens the administrator's authority to waive or change requirements or conditions for exemptions. Sec. 45.56.250. Denial, suspension, revocation, condition, or limitation of exemptions - same, although the appeal rights and hearing information is moved to Article 6. Article 3. Registration of Securities and Notice Filing of Federal Covered Securities. (pp. 29-42) No significant changes to registration provisions from AS 45.55. Material changes are noted by section. Sec. 45.56.305. Securities registration by coordination - registration statement must be on file with the Administrator for 20 days unless reduced by regulation. 10 days is the current requirement. References to prompt notice by telegram are deleted. Sec. 45.56.310. Securities registration by qualification - adds a new requirement that filers disclose pending litigation that materially affects the issuer or litigation that is known to be contemplated by governmental authorities. Sec. 45.56.320. Securities registration filings - allows the administrator to set escrow time by regulation or order for certain securities issued to a promoter or to other persons at a price substantially less than the public offering price. Sec. 45.56.330. Notice filing of federal covered securities - allows imposition of late fees. Sec. 45.56.340. Viatical settlement interests - combines current AS 45.55.120 and AS 45.55.905(c) to explain the joint regulation of these interests by the Securities and Insurance statutes. Sec. 45.56.350. Waiver and modification - administrator allowed waiver authorities consolidated from other sections. Sec. 45.56.360. Denial, suspension, and revocation of securities registration - adds requirement to establish regulations explaining what conduct may be fraud upon purchasers; unreasonable discounts, compensation, profits (including options, etc.) and terms that are unfair, unjust or inequitable. Article 4. Broker-dealers, Agents, Investment Advisers, Investment Adviser Representatives, and Federal Covered Investment Advisers. (pp. 42-66) Firm, salesperson, and adviser registration (licensing) provisions are reorganized into one article, making it more user-friendly than current law. Notable changes are listed below. Sec. 45.56.405. Broker-dealer registration requirement and exemptions - includes a new "snowbird exemption" to facilitate ongoing broker-customer relationships with customers who have established a second or other residence and clarifies the number of transactions a broker-dealer may effect annually (3) if not registered in Alaska. Sec. 45.56.410. Limited registration of Canadian broker-dealers and agents - changed annual renewal to December 31 from December 1. Sec. 45.56.420. Registration exemption for merger and acquisition broker - this new provision exempts mergers and acquisitions brokers from registration (licensing) requirements because these transactions are typically between knowing parties with adequate legal counsel and scrutiny. The exemption is not available if the broker actually handles the securities exchanged in the transaction or otherwise represents an issuer or public shell company, or is subject to Securities and Exchange Commission action. Sec. 45.56.430. Agent registration requirement and exemptions - the rewrite of this section includes a statement of the types of business covered here instead of in a definitional section. Sec. 45.56.435. Investment adviser registration requirement and exemptions - includes a new "snowbird" exemption that matches the broker-dealer exemption in Sec. 45.56.405. Sec. 45.56.440. Investment adviser representative registration requirement and exemptions - these provisions mirror the broker-dealer agents in Sec. 45.56.430. Sec. 45.56.445. Federal covered investment adviser notice filing requirement - these provisions are not separately stated in the current law. Sec. 45.56.450. Registration by broker-dealer, agent, investment adviser, and investment adviser representative - combines provisions in current statute and regulations and extends the automatic registration from 30 to 45 days unless the registration is denied. Sec. 45.56.455. Succession and change in registration of broker-dealer or investment adviser - clarifies that an organizational change can generally be completed by amendment instead of a new registration (for instance a sole proprietorship moving to a limited liability company). Sec. 45.56.460. Termination of employment or association of agent and investment adviser representative and transfer of employment or association - requires the registrant file a notification with the division. Allows for an immediate temporary effective registration with a new firm when there is no new disciplinary information added. Sec. 45.56.465. Withdrawal of registration of broker- dealer, agent, investment adviser, and investment adviser representative - extends the effective date of registration withdrawal up to 60 days and allows a revocation proceeding to commence within one year. Sec. 45.56.470. Filing fees - are established and may be paid through a designee by regulation. Sec. 45.56.475. Post registration requirements - allows establishing continuing education by regulation. Sec. 45.56.480. Denial, revocation, suspension, withdrawal, restriction, condition, or limitation of registration - in addition to current provisions, allows the administrator to bar registration and includes actions taken by other regulators. Civil penalty for registrants is increased from $2,500- $10,000 per violation to up to $100,000 per violation. Article 5. Fraud and Liabilities. (pp. 66-69) Sec. 45.56.505. General fraud - same as current AS 45.55.010. Sec. 45.56.510. Prohibited conduct in providing investment advice - allows administrator to define prohibited conduct by regulation. Sec. 45.56.520. Misleading filings - same as current AS 45.55.160. Sec. 45.56.530. Misrepresentations concerning registration or exemption - same content as AS 45.55.170. Sec. 45.56.540. Evidentiary burden - same content as AS 45.55.900(c). Sec. 45.56.550. Filing of sales and advertising literature - same content as AS 45.55.150. Sec. 45.56.560. Qualified immunity - registered persons are not liable to other registered persons, under state defamation laws, for statements contained in disclosure records required to be filed with the administrator for purposes of licensing and potential discipline. This provision encourages full disclosure to the administrator. Article 6. Administration and Judicial Review. (pp. 69-89) Sec. 45.56.605. Administration - allows the administrator to develop and implement investor education initiatives and accept grants or donations for investor education. Sec. 45.56.610. Administrative files and opinions - requires the administrator keep records according to a retention schedule and outlines publicly disclosable documents. Sec. 45.56.615. Public records; confidentiality - clarifies and specifies record confidentiality. Sec. 45.56.620. Uniformity and cooperation with other agencies - expands opportunity for cooperation and sharing with governmental units, regulatory organizations for collaborative efforts including regulation, enforcement and coordination to reduce the burden of raising capital by small business. Sec. 45.56.625. Securities investor education and training fund - Creates a securities and investor education and training fund within the general fund to provide funds for investor education. 33% of the money received in civil penalties may be used for investor education and training if so appropriated by the legislature. Sec. 45.56.630. Service of process - same as current AS 45.55.980. Sec. 45.56.635. Applicability of the chapter - same as current AS 45.55.980. 4:30:59 PM REPRESENTATIVE JOSEPHSON returned attention to proposed Section 45.56.625 and asked whether licensees could pay for their education and training, instead of the state, as do members of the Alaska Bar Association. MS. ANSELM said those who violate the Alaska Securities Act should pay for investor education through one-third of the civil penalties they are assessed, and that is the source of the funds. REPRESENTATIVE COLVER asked what is currently being collected in fines. MS. ANSELM advised that there are two kinds of securities cases: consent orders result when the division negotiates with parties in violation, and civil penalties are assessed; non-consent securities fines imposed from 2012-2015, under the current law, totaled $525,000. She noted that the maximum penalty for a violation is currently $25,000; if the limit was removed, the potential fines would total $7.7 million and $3.4 million in restitution. In further response to Representative Colver, she confirmed that the revised fines are part of the proposed statute, which would increase the maximum from $25,000 for total violations, to $100,000 per violation. REPRESENTATIVE COLVER observed that the regulation changes and increase in revenue are not reflected in the fiscal note [document not identified]. MS. ANSELM stated that enforcement actions are unknown to the division; in fact, there are times when few actions are taken, thus revenue to the division is indeterminate. REPRESENTATIVE COLVER suggested that if the fiscal note reflected more revenue the legislature would be more amenable to regulatory reform. The business community seeks less bureaucracy and to increase productivity, and he encouraged the legislature to support the business sector as the state heads for "a bit of bad weather, and anything we can do to keep our corporations healthy is, is something we need to be working on." 4:36:58 PM MS. ANSELM agreed to further discuss the bill's fiscal note. REPRESENTATIVE JOSEPHSON surmised that in addition to $100,000 per violation, through criminal proceedings the division could recapture losses and collect restitution. MS. ANSELM explained that it is difficult to collect any amount, and she described three pending cases in the court system: Fortune Oil and Gas, a Texas corporation, caused a loss to Alaskan investors of over $3 million, and orders from the division have been ignored; Global Arena Capital Corporation, a New York firm, cold-called and pitched an investment to an elderly resident who lost $16,000, and who only recovered $10,000; two Alaskans formed a firm and collected $40,000 from a fellow Alaskan for the new company, which subsequently dissolved, and an agreement for rescission was reached, but the investor was never paid. 4:42:45 PM REPRESENTATIVE LEDOUX asked for an idea of how many "bad actors" have money to pay the state or their victims, and how many are judgement-proof. MS. ANSELM answered that many are judgement-proof, but there is money behind the three aforementioned perpetrators. In further response to Representative LeDoux, she advised that civil penalties are paid to the general fund and a provision in the bill directs restitution to the investor, and penalties for violations to the state. Ms. Anselm returned to the sectional analysis [original punctuation provided]: Sec. 45.56.640. Regulations, forms, orders, interpretative opinions, and hearings - combines existing AS 45.55.950 and 45.55.970 and clarifies that GAAP compliant financial statements may only be required as allowed by federal law. Sec. 45.56.645. Investigations and subpoenas - similar to existing AS 45.55.910 and allows broader cooperation with other regulators. Sec. 45.56.650. Administrative enforcement - time for a respondent to make a request for hearing after an action is taken is extended from 15 days to 30 days. Civil penalties are increased from $2,500 for a single violation and $25,000 for multiple violations to a maximum of $100,000 for a single violation with no cap for multiple violations. If a victim is an "older person" (a person over 60 years old), the respondent is subject to treble damages. Restitution and actual costs of investigation may be ordered. The administrator may deny the use of securities exemptions under Article 2 and registration (licensing) exemptions under Article 4 if a person violates the Act. The administrator may petition the Superior Court to enforce a final order and the Court may hold a person in contempt for violating an order of the administrator, punishable by up to $100,000 per violation, in addition to any administrative penalties that were originally assessed. Sec. 45.56.655. Civil enforcement - the administrator may seek remedies such as asset freezes, an order of rescission, restitution, and civil penalties of up to $100,000 per violation, and all damages may be trebled if the victim is an "older person" (person over 60 years of age). Sec. 45.56.660. Civil liability - outlines instances where the seller is liable to the purchaser and potential remedies (actual damages including interest as determined by the court); also describes instances where the buyer may be liable to the seller. Sec. 45.56.665. Rescission offers - outlines the rescission offer process, including a new requirement that the offeror must demonstrate the ability to pay and then actually pay as promised. Sec. 45.56.670. Criminal enforcement - knowing violations of the Act and fraud are punishable as class C felonies punishable under AS 12.55.125. Unknowing violations are punishable as class A misdemeanors and fine of not more than $100,000. Individuals who alter or destroy evidence are guilty of a class C felony and a fine of not more the $500,000 or both. Sec. 45.56.675. Judicial review - appellants have 30 days to request review of a final order. 4:49:01 PM REPRESENTATIVE LEDOUX returned attention to proposed Section 45.56.670 [text previously provided] and asked for an example of an unknowing violation. MS. ANSELM explained that if a person can prove that they were unaware of securities laws, even when they should have been aware, a lesser fine is assessed. She returned to the sectional analysis [original punctuation provided]: Article 7. Miscellaneous and Additional General Provisions. (pp. 89-100) Sec. 45.56.710. Reimbursement of expenses incident to examination or investigation - same as AS 45.55.915. Sec. 45.56.720. Electronic records and signatures - facilitates filing of electronic records and signatures. Consumers must consent and have the option to withdraw such consent. Sec. 45.56.730. References to federal statutes - a list of all federal statutes referenced in the Act. Sec. 45.56.740. References to federal agencies - notes that a reference to an agency of the United States is also a reference to a successor agency. Sec. 45.56.900. Definitions. - Updates federal citations - New definitions include: - Disqualifier - Filing - Institutional investor (reflects federal law) - Insurance company - Insured - International Banking Institution - Offer to purchase - Older person - a person that is age 60 or older (from AS 47.65.290(6)) - Price amendment - Record - Self-regulatory organization - Sign Sec. 45.56.995. Short title. This chapter may be cited as the Alaska Securities Act. SECTIONS 26 - 28 (pp. 101-105). Citations are modified to reflect Chapter 45.56 in place of Chapter 45.55 references; federal law citations are updated. SECTION 29 (p. 105) - Repeals statutes that are no longer needed in AS 45.55 because they do not apply to Alaska Native Claims Settlement Act corporation proxy solicitations. SECTION 30 (p. 105) - Amends indirect Court Rules relating to changes in AS 45.56. SECTION 31 (pp. 105-106) - Allows the department to adopt transition regulations. SECTION 32 (pp. 106-107) - Amends the law to effect transition and application of AS 45.55 for existing proceedings, existing rights and duties. SECTION 33 (p. 107) - Reviser's instruction to rename AS 45.55 to Alaska Native Claims Settlement Act Corporations Proxy Solicitations and Initial Issuance of Stock. SECTION 34 (p. 107) - Conditional effect of certain provisions upon constitutionally required vote of each house. SECTION 35 - July 1, 2016 effective date. 4:54:06 PM REPRESENTATIVE LEDOUX returned attention to proposed Section 45. 56.305 [text previously provided], and asked whether email was substituted for prompt notice by telegram. MS. ANSELM said yes. REPRESENTATIVE LEDOUX directed attention to proposed Section 45.56.310 [text previously provided] and recalled a proposed change that would require disclosure of any litigation, whether or not contemplated by a government authority. MS. ANSELM agreed to make this change. REPRESENTATIVE LEDOUX directed attention to proposed Section 45.56.560 [text previously provided], and confirmed that qualified immunity would not be granted if there is reckless disregard of the truth, or a known untruth. MS. ANSELM said absolutely. REPRESENTATIVE JOSEPHSON directed attention to proposed Section 45.56.670 [text previously provided], and asked whether there are [Alaska Statutes] Title 11 crimes that could be filed in addition to the class C felony in the proposed statute. MS. ANSELM deferred to the Department of Law. REPRESENTATIVE JOSEPHSON surmised that the impetus for the proposed bill was that the pertinent legislation was outdated, and asked whether HB 194 was based on a model. MS. ANSELM said the bill is a combination of a 2002 model act, modifications from other states, experiences in Alaska, and an increase in investor protection. [HB 194 was held over.]