HOUSE BILL REPORT

EHB 713

BYRepresentatives Winsley, Lux, Zellinsky and Chandler

Revising provisions on debt-related securities.

House Committe on Financial Institutions & Insurance

Majority Report:     Do pass.  (14)

     Signed by Representatives Lux, Chair; Zellinsky, Vice Chair; Betrozoff, Chandler, Crane, Day, Dellwo, Ferguson, P. King, Meyers, Niemi, Nutley, Silver and Winsley.

House Staff:Harry Reinert (786-7110)

AS PASSED HOUSE MARCH 10, 1987

BACKGROUND:

Debenture companies are defined by statute as those entities which issue securities to be used as capital of the issuer for the purpose of investing, holding, or trading in mortgages, property contracts, or security agreements.  The director of licensing through the securities division is responsible for regulation of debenture companies.  The debenture company sells its securities to investors with the expectation that the debt obligations it purchases will provide sufficient income to pay the securities it has issued.  Debenture companies are required to maintain a specified level of paid-in capital based on the level of outstanding securities of the company.  At least fifty percent of the securities issued by a debenture company must have a maturity of two or more years.  The directors and officers of the debenture company are prohibited from certain types of conflicts of interest in operating the company.

The securities act generally applies to any note, stock, evidence of indebtedness, or similar type of obligation.  The securities act exempts certain transactions involving covered securities from compliance with the act's provisions.  Among the exempt transactions is a transaction involving a bond or other evidence of indebtedness secured by a mortgage, deed of trust, or real property contract if the entire mortgage, deed of trust, or contract is offered and sold as a unit.

SUMMARY:

The definition of debenture company is modified.  Provisions relating to conflicts of interest are modified to include controlling persons as well as officers and directors.  New requirements are added governing the acquisition of debenture companies.  An acquiring party must file a notice of application with the director of licensing.  The director may halt the acquisition if there is reason to believe the debenture company will be harmed.  Transactions between the company and affiliates are restricted.

The supervisor of banking has general supervisory authority to review the operation of debenture companies and is required to audit the books of debenture companies.  The supervisor may require the company to stop engaging in unsafe or unsound practices.  The cost of the audit, supervision, and enforcement are to be paid by the company.

The transaction exemption from the securities act for single mortgages and real estate contracts is modified to exclude from the exemption partial interests in more than one mortgage, and multiple obligations sold as part of a single plan of financing.

The changes affecting debenture companies take effect January 1, 1988.  The supervisor of banking and the securities administrator may adopt transition rules to allow debenture companies already in business time to come into compliance with the act.  All companies must be in compliance by January 1, 1990.

EFFECT OF SENATE AMENDMENT(S):  The Senate amendment deletes provisions giving the supervisor of banking authority to establish capital requirements for debenture companies and general supervisory power over debenture company lending practices.  The Senate amendment also deletes provisions governing the nature and quality of investments that debenture companies may make and eliminates restrictions on transactions between a debenture company and its subsidiaries.  A $42,000 appropriation is made to the Department of Licensing.

Fiscal Note:    Requested February 10, 1987.

House Committee ‑ Testified For:     Tom Oldfield, Division of Banking; Debra Bortner, Securities Division;  Mike Stevenson, Division of Licensing; and Benito Vasquez.

House Committee - Testified Against: None Presented.

House Committee - Testimony For:     Debenture companies are a risky undertaking.  The securities division does not have the authority to regulate the practice of companies that act like banks.  This bill will add the necessary authority to assure that these companies operate in a safe and sound manner.  In addition, the bill will close a loophole in the securities law that is frequently used to avoid registration of securities.

House Committee - Testimony Against: None Presented.

VOTE ON FINAL PASSAGE:

     Yeas 97; Nays 0; Absent 0; Excused 1

Excused:   Representative Doty