HOUSE BILL REPORT
HB 1904
BYRepresentatives Winsley and Lux
Changing provisions relating to sales of securities.
House Committe on Financial Institutions & Insurance
Majority Report: The substitute bill be substituted therefor and the substitute bill do pass. (14)
Signed by Representatives Lux, Chair; Zellinsky, Vice Chair; Anderson Betrozoff, Chandler, Crane, Day, Dellwo, Dorn, Ferguson, P. King, Nutley, Silver and Winsley.
House Staff:Harry Reinert (786-7110)
AS REPORTED BY COMMITTEE ON FINANCIAL INSTITUTIONS & INSURANCE
FEBRUARY 3, 1988
BACKGROUND:
Under the Securities Act, a broker-dealer is any person who effects transactions in securities. Exempted from the definition is a person who does not have an office in this state and during any twelve month period does not direct 15 or more offers to sell or buy securities to persons other than sophisticated investors.
An investment adviser is any person who advises others about the value of securities and the advisability of investing in, purchasing, or selling securities. A broker-dealer is not an investment adviser.
The term "security" includes notes, stocks, a wide variety of certificates, and other investments.
An investment adviser salesperson is a person employed or retained by an investment adviser to solicit clients.
Broker-dealers and salespersons must register in this state prior to transacting any business in the state. A broker- dealer may not employ a salesperson unless the salesperson is registered or exempt from registration.
The Director of Licensing may require broker-dealers and investment advisers to maintain minimum capital and prescribe a ratio between net capital and overall indebtedness.
Broker-dealers and investment advisors must maintain records and accounts prescribed by the director. The director may examine these records and accounts.
The director may cancel or deny the registration of a registrant in this state if the person is subject to any order from another state or the federal government denying or revoking the person's registration in that state or under federal law.
Financial statements are required of those registering securities by qualification in this state. Different statements are required of those involved in a commercial, industrial, or extractive business which is in the developmental stage from those involved in other businesses. For those not covered by this classification, audited financial statements are required for the one to two year period prior to the offering, depending on the established proceeds from the offering.
The director may require persons filing registration statements to file quarterly updates. A $10 fee is charged for these updates.
The registration requirements of the securities act do not apply to securities issued by non-profit corporations. The security must contain a statutorily prescribed statement.
Transactions by broker-dealers are exempt from portions of the securities act if the issuer is named in a recognized securities manual or the security has a fixed maturity and there has been no default in the previous three years. Another exempt transaction is a security previously sold to the public if the security was lawfully sold in this state or any other state.
The director has authority to subpoena witnesses and conduct hearings to investigate violations of the securities act. The director may issue cease and desist orders or file judicial proceedings.
A person who sells a security in violation of the act and a person who buys a security in violation of the act is liable for losses incurred by the purchaser or seller, respectively.
Salespersons and investment adviser salespersons pay a $35 registration fee and a $15 annual renewal fee.
The director may issue interpretive opinions.
SUMMARY:
SUBSTITUTE BILL: Exempted from the securities act are broker-dealers located in this state who effect transactions with no more than three persons in the state in a twelve month period, rather than the current 15 offer limit.
Broker-dealers are exempt from regulation as investment advisers only when the performance of investment advising is incidental to their regular business.
The definition of a security is expanded to include transactions on a national security exchange relating to foreign currency.
Investment adviser salespersons are renamed investment adviser representative.
Broker-dealers and salespersons are not required to register if they only effect exempt transactions. A salesperson must register in this state and in any other state in which the salesperson is making or attempting to make sales.
The director may require a minimum capital requirement and a ratio between net capital and indebtedness, or require a surety bond of broker-dealers and investment advisors with a net worth of less than $100,000.
The director may assess the estimated expenses of conducting examinations of broker-dealers and investment advisers.
The authority of the director to suspend, cancel, or deny a registration because of the action of another regulatory agency is clarified.
Financial statement requirements for securities registered by qualification are simplified. The threshold for determining when more than one prior year's financial statements must be provided is increased to $l,000,000. The securities administrator may require any additional statements that are determined to be necessary.
The ten dollar fee to file quarterly statements by broker-dealers is eliminated.
The director is given authority to prescribe the notice that must be placed on a security issued by a non-profit corporation.
The exemption for transactions in security by issuer listed in a manual is replaced by an exemption for transactions in securities issued by entities required to file reports under the Securities Exchange Act.
The transaction exemption for securities previously sold is limited to securities previously sold in this state and which have been registered with the securities and exchange commission.
In conducting investigations, the director may enter into reciprocal agreements with other regulatory agencies to enforce subpoenas.
It is unlawful for a person to create a false or misleading impression of the activity in a stock or to indicate false or misleading information to affect the price of the stock.
The director may, after a hearing, impose a fine for violations of the securities act. An investment adviser or investment advise representative who violates provisions of the securities act is liable to the client for damages plus interest and reasonable attorney's fees.
The registration fee for salespersons and investment adviser representatives is increased to $40 for an original registration and to $20 for renewals.
The director may issue letters indicating that no enforcement action will be taken with respect to a specific act or transaction. The director is give authority to cooperate with other regulatory authorities in regulating securities and securities transactions.
SUBSTITUTE BILL COMPARED TO ORIGINAL: The original bill had a fee increase for broker-dealer salespersons and investment adviser representatives of between $15 and $20. The substitute increases the fee by $5.
Fiscal Note: Requested February 3, 1988.
House Committee ‑ Testified For: Deborah Bortner and Michael Stevenson, Securities Division.
House Committee - Testified Against: Bruce Ellis, Financial Planner (in part).
House Committee - Testimony For: The bill is a product of review by the Securities Division's Investment Advisory Board. There have been several changes in the model securities act and federal law regulating securities. This bill updates definitions in the state securities act to come into conformity with these other statutes. It also gives the securities division stronger and more flexible enforcement authority and better ability to cooperate with regulatory authorities from other states and the federal government.
House Committee - Testimony Against: There are a number of changes that may have a substantial impact on small broker-dealers and there has not been enough time to review the proposed effects of the bill.