Legislature(2003 - 2004)
04/06/2004 08:01 AM Senate STA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 fine. 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 discretion." 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 bill. 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 regulation." 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 intends]. 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 legislature." 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 notice]. 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 notice." REPRESENTATIVE GRUENBERG stated that he thinks that Section 1 is an issue that the House State Affairs Standing Committee should address. Number 0268 REPRESENTATIVE HOLM asked how many companies "this" would involve. 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 concern. 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].