Legislature(2003 - 2004)

04/06/2004 08:01 AM Senate STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 527-ALASKA SECURITIES ACT                                                                                                  
CHAIR WEYHRAUCH announced  that the next order  of business would                                                               
be HOUSE BILL NO. 527, "An  Act relating to the Alaska Securities                                                               
Act, including reports,  proxies, consents, authorizations, proxy                                                               
statements,  and other  materials,  civil  penalties, refunds  of                                                               
proceeds  from violations,  restitution,  and investment  adviser                                                               
representatives; and providing for an effective date."                                                                          
Number 1793                                                                                                                     
REPRESENTATIVE  LYNN  moved  [to adopt]  the  proposed  committee                                                               
substitute  (CS)  for  HB 527,  Version  23-LS1792\Q,  Bannister,                                                               
4/5/04, [as a work draft].                                                                                                      
CHAIR WEYHRAUCH objected for discussion purposes.                                                                               
CHAIR WEYHRAUCH  reviewed that at the  last hearing on HB  527, a                                                               
representative  of the  New York  attorney  general's office  had                                                               
testified.  He also reminded  the committee of the correspondence                                                               
in  the  committee  packet from  [Warren  E.  Buffet,  Chairman],                                                               
Berkshire Hathaway.   He stated  that he  is not certain  that HB
527 does what  he would like it  to do.  He  said his inclination                                                               
is to  "get into  this with  both feet,"  but thinks  there isn't                                                               
time, nor is  there the inclination by the committee  to do that.                                                               
He said,  "I just think that  we have an obligation  to equip our                                                               
state  with the  means  to do  those kind  of  things the  public                                                               
sector  is normally  charged  to do,  without  the public  sector                                                               
paying for it when there's wrong-doing."                                                                                        
CHAIR WEYHRAUCH  noted that there  were concerns raised  by other                                                               
members  of the  administration  regarding some  portions of  the                                                               
bill, which he said have been addressed in Version Q.                                                                           
Number 1715                                                                                                                     
VINCE  USERA, Senior  Securities  Manager,  Division of  Banking,                                                               
Securities  & Corporations,  Department of  Community &  Economic                                                               
Development  (DCED),  described   his  involvement  working  with                                                               
[Legislative  Legal  and  Research  Services]  to  come  up  with                                                               
Version Q.                                                                                                                      
Number 1690                                                                                                                     
REPRESENTATIVE GRUENBERG  stated that  he also wanted  to proceed                                                               
as Chair Weyhrauch  did.  He said, "There are  lots of securities                                                               
problems in the state, but I think  this is an area that has some                                                               
troubling aspects  on a national scale,  and I'd like to  see our                                                               
state  in  the forefront  of  protecting  our consumers.    We're                                                               
basically  a consumer  state, in  this area."   He  expressed his                                                               
appreciation of Mr. Usera's willingness  to look at "the Takeover                                                               
Bid Disclosure  Act."  He  stated for  the record that  he thinks                                                               
"we" probably all  agree that the Alaska  Takeover Bid Disclosure                                                               
Act is  probably unconstitutional and  needs to be repealed.   He                                                               
mentioned working  in the House  Judiciary Standing  Committee to                                                               
develop a new  Act to add to  the bill.  He asked  Mr. Usera, "Is                                                               
that not correct?"                                                                                                              
MR. USERA answered, "That's correct."                                                                                           
REPRESENTATIVE GRUENBERG directed attention  to page 3, [line 17-                                                               
19], which read in part as follows:                                                                                             
        The amount of the restitution paid to the harmed                                                                        
      person may be two times the amount of loss caused to                                                                      
     the person by the violator.                                                                                                
REPRESENTATIVE  GRUENBERG  commented  that's  almost  a  kind  of                                                               
punitive damage,  except that it goes  to the victim, not  to the                                                               
state.  He asked how "two times" became established.                                                                            
CHAIR WEYHRAUCH said  he added that language.   He explained that                                                               
it's intended  to deter wrongful  conduct, to pay those  who have                                                               
been  harmed, and  to give  notice to  those potential  offenders                                                               
that "if they're going to do  business here, ... they have to cut                                                               
square corners  with the consumer  and, if they don't,  they have                                                               
to  pay   a  penalty."     He  revealed  that  he   had  received                                                               
confirmation from the drafters of  the bill that "this would pass                                                               
muster if it were challenged."   He noted that this is similar to                                                               
"the wage and hour statutes."                                                                                                   
REPRESENTATIVE GRUENBERG  asked, "Was it  a policy call  for 'two                                                               
times', or  was it more  of a  recognition of the  maximum extent                                                               
constitutionally permissible?"                                                                                                  
CHAIR WEYHRAUCH responded, "There's  a tension there, because the                                                               
idea embodied  in the statute is  'two times', but that's  to the                                                               
maximum extent allowed by the constitution."                                                                                    
REPRESENTATIVE GRUENBERG asked Chair  Weyhrauch how he would feel                                                               
about allowing the  amount of a recovery to be  determined by the                                                               
administrator    to   the    maximum   extent    constitutionally                                                               
permissible,  thus "leaving  it  to that  person's discretion  to                                                               
that extent."                                                                                                                   
CHAIR   WEYHRAUCH   responded   that   the   problem   with   the                                                               
constitutional issue  and punitive damages cases  is that they're                                                               
subject to "what ... seems right to a judge."  He said:                                                                         
     This is  a tension between attracting  business capital                                                                    
     in  the state  and  wanting to  do  business here,  and                                                                    
     having a certainty for businesses  in order to do their                                                                    
     work here.   By spelling out in statute,  as opposed to                                                                    
     allowing  an  ambiguous  judge-made  sanction,  you  do                                                                    
     provide  that ...  level  of  certainty to  businesses,                                                                    
     which I  think they  need, as  opposed to  a judge-made                                                                    
Number 1395                                                                                                                     
REPRESENTATIVE  GRUENBERG stated  that "these  ... administrative                                                               
actions" sometimes  involve brokerage  houses, and the  amount to                                                               
an individual  investor may be small.   He noted that  the number                                                               
of investors in [Alaska] in a  given corporation may be small and                                                               
[so the  bill would] hardly  provide any  deterrence at all.   He                                                               
suggested  that it  might be  constitutionally permissible  and a                                                               
wise policy  to allow  discretion by  the administrator  to award                                                               
more damages.                                                                                                                   
MR. USERA  noted that the  consumer protection statutes  in Title                                                               
45 allow for treble damages.  He continued as follows:                                                                          
     The way we've administered the  statute in the past has                                                                    
     been  to  try to  levy  enough  fines to  convince  the                                                                    
     wrongdoer  to  make  the  victim   whole.    If  it  is                                                                    
     egregious and we can double  that amount, that would be                                                                    
     an  excellent outcome.   I  don't  have any  experience                                                                    
     with  levying two  times  the fine  or  things of  that                                                                    
     nature, ... but I don't see any harm coming from this.                                                                     
CHAIR WEYHRAUCH  pointed out  that the  language reads  that [the                                                               
restitution paid] "may" be two times - it's discretionary.                                                                      
MR. USERA said  [the double amount] would only  be implemented in                                                               
the case of an egregious wrong, and  then it may be in place of a                                                               
fine.  He concluded, "This would  give us the ability to make the                                                               
victim whole, and perhaps a little bit more than whole."                                                                        
REPRESENTATIVE GRUENBERG asked how  the department would feel "if                                                               
this were  allowed to  be treble damages,  to be  consistent with                                                               
the unfair trade factor?"                                                                                                       
MR. USERA replied that he would  like the ability to do that, but                                                               
he only sees that coming about in an unusual situation.                                                                         
REPRESENTATIVE  GRUENBERG   said,  "At   least  you'd   have  the                                                               
REPRESENTATIVE  GRUENBERG  asked  Chair  Weyhrauch  if  he  would                                                               
consider that a friendly amendment.                                                                                             
CHAIR  WEYHRAUCH  suggested  that the  House  Judiciary  Standing                                                               
Committee  could decide  to make  that change  when it  hears the                                                               
Number 1145                                                                                                                     
TERRY  ELDER, Alaska  Representative for  the Investment  Company                                                               
Institute  (ICI),  told  the  committee   that  the  ICI  is  the                                                               
professional  organization  whose  members are  the  mutual  fund                                                               
industry.   Because  many  of the  mutual  funds have  investment                                                               
advisors  that  are  federally  registered,  [the  ICI]  is  also                                                               
interested  in  issues  that  affect  those  advisors  and  their                                                               
representatives.   He noted that  the ICI  is active both  at the                                                               
federal level and  at the state level, and  has historically been                                                               
cooperative with Alaska's state regulations.   Mr. Elder said the                                                               
ICI has  always supported both  state and federal  regulations of                                                               
the security industry  and works closely with all  the states and                                                               
the  North American  Securities  Administrators Association,  for                                                               
example,  regarding  common  language  that  is  in  the  Uniform                                                               
Securities Act.                                                                                                                 
MR.  ELDER turned  attention to  Section 1  [of Version  Q].   He                                                               
explained that  Section 1  would exempt  the Securities  Act from                                                               
[AS]  37.10.050,   which  deals  with   fees  that  are   set  by                                                               
regulation.   He  stated  that  the ICI's  position  would be  to                                                               
encourage the  committee to  delete Section  1 before  moving the                                                               
bill out of  committee.  He explained that  when executive branch                                                               
agencies  set  fees   by  regulation  and  those   fees  have  no                                                               
relationship to  the cost  of regulation,  that becomes  an issue                                                               
for the ICI.  He continued as follows:                                                                                          
     We  think [that]  to exempt  the Securities  Act almost                                                                    
     all by  itself there, sort of  jumps out at you.   It's                                                                    
     one  of fairness;  you're singling  out the  securities                                                                    
     industry for exemption from  that limitation, which the                                                                    
     ICI doesn't think is fair.   The ICI already provides a                                                                    
     sea of revenue to the  State of Alaska that exceeds the                                                                    
     total  cost of  the Division  of Banking,  Securities &                                                                    
     Corporations,  and so  we would  argue from  a fairness                                                                    
     standpoint  that ...  industries  shouldn't be  singled                                                                    
     out for exemption ....                                                                                                     
MR. ELDER, on the subject  of delegating legislative power to the                                                               
executive branch,  said [the ICI]  doesn't have any  problem with                                                               
legislatures  setting   fees  in  statutes.     The  problem,  he                                                               
explained,  is  allowing the  executive  branch  to set  fees  by                                                               
regulation.  He said AS  37.10.050 makes sense if the legislature                                                               
were to  say, "Okay  go ahead  and do that  by regulation  and we                                                               
aren't going  to get  involved in  that or  worry about  that, as                                                               
long as  you're covering your costs."   He said he  doesn't think                                                               
anybody would disagree with that.   For example, he said, "If you                                                               
spent $10  million in regulation and  you wanted to bring  in $50                                                               
million of  revenue, that  would be more  of a  legislative issue                                                               
than  we  think   should  be  delegated  to   an  agency  through                                                               
Number 0831                                                                                                                     
CHAIR WEYHRAUCH said [Section 1 of  Version Q] was added to allow                                                               
the executive  branch to collect  fees, because of the  volume of                                                               
work  that  it does  through  the  securities  area.   He  added,                                                               
"Certainly that's  subject to  any review  and comment  period by                                                               
the  industry  on  that  regulation."     He  remarked  that  the                                                               
legislature  is   always  troubled  when  the   executive  branch                                                               
implements  regulations that  stray  from  what [the  legislature                                                               
MR. ELDER noted that a lot  of discussion when [AS 37.10.050] was                                                               
last amended was  focused around resource agencies  and not other                                                               
agencies such as the securities  division.  That's another reason                                                               
it would be "more appropriate to do  it as a general look at that                                                               
issue and deal with all of  them," he said, adding, "Our position                                                               
is  that they  should reflect  costs, unless  they're set  by the                                                               
CHAIR  WEYHRAUCH told  Mr. Elder  that the  bill would  "pick up"                                                               
issues more  related to the securities  area when it is  heard in                                                               
the House Judiciary  Standing Committee, so "it may  be even more                                                               
relative in the next committee."                                                                                                
Number 0652                                                                                                                     
MR. ELDER clarified:                                                                                                            
     The fees  that we're talking  about here that  are paid                                                                    
     by the mutual fund for this  are not paid by large Wall                                                                    
     Street companies.  These are  fees that are paid by the                                                                    
     shareholders;  they're  expenses  of the  fund  and  so                                                                    
     they're   passed   on   directly  to   the   individual                                                                    
     shareholders.   And  ...  that's  another concern  that                                                                    
     everybody  has;  if  you're concerned  about  the  fees                                                                    
     charged  within the  mutual  fund  industry, then  that                                                                    
     would show up as one of those fees.                                                                                        
Number 0592                                                                                                                     
REPRESENTATIVE GRUENBERG asked  how much the fees  are for [state                                                               
MR. ELDER  offered his  understanding that  currently there  is a                                                               
flat  fee of  $600 for  [a] one-year  notice and  $1,100 for  two                                                               
years, so right now it's a flat  fee.  And  it's a notice filing,                                                               
not  a   registration,  because   in  1996,  when   the  National                                                               
Securities   Market   Improvement   Act  was   passed,   Congress                                                               
established  what it  called "federal  covered  securities."   He                                                               
explained  that  mutual  fund shares  are  considered  a  federal                                                               
covered security.   He  explained what that  means is  that since                                                               
1996,  states can't  require registration  of the  securities and                                                               
can't regulate  what's in the  prospectus, for example,  but they                                                               
retain enforcement authority,  with respect to fraud.   He added,                                                               
"And  so, it's  limited  to fraud  on the  state  level, and  the                                                               
Securities Act reflects that now,  because it was amended in 1999                                                               
and we also changed to a flat fee."                                                                                             
MR. ELDER, in response to a question from Representative                                                                        
Gruenberg, explained the difference between a registration and a                                                                
notice filing as follows:                                                                                                       
     When you register, you can  also be denied.  [When] you                                                                    
     register,  you have  to meet  a whole  laundry list  of                                                                    
     criteria  that would  be  in the  statute  in terms  of                                                                    
     whatever  you're  registering  for, and  usually  those                                                                    
     things would  be listed and  disclosed to  investors in                                                                    
     prospectuses  and things  like  that.   And they  would                                                                    
     submit that  to a  state under a  registration concept,                                                                    
     and  the state  would  review that  and  say, "Yes,  it                                                                    
     meets it" or  "No, it doesn't," and either  allow it or                                                                    
     disallow it.                                                                                                               
     In  a  notice  filing,   it  is  recognized  that  what                                                                    
     Congress  did  was  essentially take  the  registration                                                                    
     authority away from the state.   They are now federally                                                                    
     registered;  they're  registered  with  the  SEC  [U.S.                                                                    
     Securities and Exchange Commission].   And so, what the                                                                    
     state  gets is  in fact  a  notice filing  ... for  two                                                                    
     reasons:   One is to  sort of  let the state  know that                                                                    
     we're ...  going to  be selling  this security  in your                                                                    
     state, and two, it was a  way for the state to continue                                                                    
     to receive  fees.   Because obviously,  one of  the big                                                                    
     issues in  1996, when the federal  government made that                                                                    
     change,  was, "If  we take  the registration  authority                                                                    
     away from the states, won't  that have a big fee impact                                                                    
     on  them?"   And  they  decided  to make  that  revenue                                                                    
     neutral, to  the extent they  could; it  wasn't totally                                                                    
     revenue neutral,  but they tried  to do that.   And so,                                                                    
     one way to  do that was to allow notices  to the states                                                                    
     for  federally covered  securities.    The state  can't                                                                    
     say, "No, I don't want you  to sell XYZ in Alaska," but                                                                    
     the state  can say,  "This is what  we charge  for this                                                                    
REPRESENTATIVE GRUENBERG stated that he thinks that Section 1 is                                                                
an issue that the House State Affairs Standing Committee should                                                                 
Number 0268                                                                                                                     
REPRESENTATIVE HOLM asked how many companies "this" would                                                                       
MR. ELDER answered  he isn't certain.  He explained  that the ICI                                                               
represents  95   percent  of  the  industry,   and  the  industry                                                               
registers at  the federal level  and notices at the  state level,                                                               
by fund.  He surmised  that approximately 8,000 funds are noticed                                                               
in Alaska.   He  clarified that in  terms of  "mother companies,"                                                               
there would be  fewer than that, because, for  example, a company                                                               
may have a number of funds and  will notice each one of the funds                                                               
that  they  want to  sell  in  Alaska.   Each  of  the funds  are                                                               
separate securities that have their own management.                                                                             
Number 0161                                                                                                                     
REPRESENTATIVE HOLM  stated that the  intent [of the bill]  is to                                                               
ensure that  there's no skullduggery  going on with the  funds to                                                               
the detriment  of the investors from  Alaska.  He added:   "Which                                                               
leads me to my thought as to  why we're having a notice of filing                                                               
other than for  the purpose of oversight.  It  appears to me that                                                               
if we  don't really have  much oversight  other than the  fact we                                                               
know you're here."                                                                                                              
MR.  ELDER said  that's correct.   He  noted that  there are  two                                                               
reasons for  the notice  filing, and  one is  simply to  "make it                                                               
revenue neutral to  the state."  He said, "You  can maintain your                                                               
fee  income by  having this  notice filing  and charging  for the                                                               
notice.   That's  why one  must be  careful not  to slip  and use                                                               
"registration"  instead   of  "notice,"  because  it   means  two                                                               
different  things.    He  concurred   that  there  is  much  more                                                               
oversight   involved  with   registration  than   with  [notice].                                                               
Notwithstanding  that, he  said,  "Where you  do have  authority,                                                               
however,  in terms  of ...  oversight, is  in enforcement  issues                                                               
related to  fraud."  He  reiterated that  the ICI has  never been                                                               
against that idea.                                                                                                              
TAPE 04-55, SIDE A                                                                                                            
Number 0001                                                                                                                     
REPRESENTATIVE HOLM  directed attention  to Section 6,  and asked                                                               
Mr. Elder if [the amount of  restitution that may be paid] was of                                                               
MR. ELDER responded that the only  thing he is concerned about is                                                               
Section 1.  Notwithstanding that, he added the following:                                                                       
     The only thing that you  might want to think about with                                                                    
     the others is whether or  not you want to differentiate                                                                    
     between   fines   and   potential  fines   related   to                                                                    
     intentional     violations,    versus     unintentional                                                                    
     violations.  But the ICI is not taking that position;                                                                      
     I'm just offering that as a friendly suggestion.                                                                           
MR.  ELDER,  in  response  to   a  question  from  Representative                                                               
Gruenberg, revealed that  he worked in the  Division [of Banking,                                                               
Securities & Corporations]  for eight years and  was director for                                                               
the last four years, before his retirement.                                                                                     
Number 0102                                                                                                                     
REPRESENTATIVE GRUENBERG  asked Mr. Elder if  he, personally, had                                                               
any other suggestions for the committee to consider.                                                                            
MR. ELDER,  specifying that he  was responding with  his personal                                                               
opinions, noted  that the State of  Alaska has a long  history of                                                               
using uniform  language, and stated  that he  personally supports                                                               
that as  useful because it's  good for  industry to know  what to                                                               
expect from one state  to another.  He noted that  there is a new                                                               
Uniform Securities  Act of 2002,  which was recently  passed, and                                                               
both  the North  American  Securities Administrative  Association                                                               
and  the ICI  support it.   He  also suggested  that it  might be                                                               
appropriate to  look at the  Uniform [Securities] Act, or  at the                                                               
statute in total, rather than doing something piece meal.                                                                       
MR.  ELDER   noted  that  currently,   there  is   a  substantial                                                               
differentiation    between    intentional    and    unintentional                                                               
violations; for  example, he  said, he  has seen  violations that                                                               
are bad and violations that are  technical, and so he thinks they                                                               
should be differentiated in the way they are fined.                                                                             
Number 0455                                                                                                                     
CHAIR WEYHRAUCH asked Mr. Usera to address Section 1.                                                                           
MR. USERA noted, "Section 1 of  the bill allows us to charge what                                                               
we're charging now, plus any increases  that may come along."  He                                                               
said he has  estimated that the fees that are  charged now "would                                                               
add something  in the range of  .0000006 of a cent  to the dollar                                                               
amount of a mutual fund."   He clarified that if somebody owns 50                                                               
shares, he/she  is not even going  to see a penny  added to their                                                               
fees.   He admitted that this  is one area where  the state takes                                                               
in more than it  spends.  He said it's always been  that way.  He                                                               
noted that  currently the  amount taken  in is  approximately $10                                                               
million.   Doing  away with  Section  1 probably  would have  the                                                               
effect of losing  $10 million to the general fund,  which he said                                                               
would  be a  "pretty strong  hit."   He said,  "We're one  of the                                                               
profit centers  of state  government and  I personally  don't see                                                               
anything wrong with making a profit."                                                                                           
MR. USERA remarked:                                                                                                             
     And it  just seems to  me to  be an improvident  act to                                                                    
     limit  state government  to what  it  spends -  there's                                                                    
     just  no rhyme  or  reason  to it.    We don't  propose                                                                    
     raising  fees beyond  an exorbitant  amount.   I  mean,                                                                    
     right  now  they're  $600.   We  are  proposing  a  fee                                                                    
     change,  ... in  regulation,  basing it  on the  assets                                                                    
     under  management:   One fee  for  under $100  million,                                                                    
     another fee  for up  to $750  million, and  another fee                                                                    
     for those who are $750  million and beyond.  That seems                                                                    
     to be reasonable.  And ...  the cost would be passed on                                                                    
     to  the individual  owner.   If all  50 states  were to                                                                    
     charge  that,  you  might  add  on  fifty  cents  to  a                                                                    
     customer's mutual  fund. ...  The mutual  fund industry                                                                    
     has  been discovered  to have  overcharged fees  in the                                                                    
     range of  $10, $12,  $15 per person,  and ...  the fees                                                                    
     that we would  charge would pale in  comparison to what                                                                    
     they're gouging their customers for now.                                                                                   
REPRESENTATIVE GRUENBERG stated,  "In view of what  Mr. Usera has                                                               
said and  hearing what Mr. Elder  has said, I'm not  convinced we                                                               
should delete Section (indisc. - voice trailed off)."                                                                           
CHAIR WEYHRAUCH closed public testimony.                                                                                        
Number 0775                                                                                                                     
CHAIR  WEYHRAUCH offered  his  understanding that  Representative                                                               
Lynn had "moved CS  for HB 527, Version Q."   He asked, "Is there                                                               
objection to  moving this  with individual  [recommendations] and                                                               
attached  fiscal note?"    He said,  "Seeing  none, so  ordered."                                                               
[Although the committee  treated the proposed CS  as having moved                                                               
from committee, the motion that  was actually pending was whether                                                               
to adopt Version Q as a work draft].                                                                                            

Document Name Date/Time Subjects