SENATE BILL REPORT

SHB 1525

BYHouse Committee on Financial Institutions & Insurance (originally sponsored by Representatives Winsley, Lux, Chandler, P. King, Nutley, Betrozoff, Holland and May)

Changing requirements for debenture companies.

House Committe on Financial Institutions & Insurance

Senate Committee on Financial Institutions & Insurance

Senate Hearing Date(s):February 25, 1988

Majority Report:  Do pass.

      Signed by Senators von Reichbauer, Chairman; West, Vice Chairman; Johnson, Kreidler, McCaslin, Moore, Rasmussen, Sellar, Smitherman.

Senate Staff:Benson Porter (786-7470)

                  February 25, 1988

AS REPORTED BY COMMITTEE ON FINANCIAL INSTITUTIONS & INSURANCE, FEBRUARY 25, 1988

BACKGROUND:

Debenture companies are defined by law as those entities which issue securities for operating funds for the purpose of investing, holding or trading in mortgages, property contracts or security agreements.  There are no limitations on the nature of or combination of investments that a debenture company may make.  The director of the Department of Licensing through the Securities Division is responsible for regulation of debenture companies.

The director may investigate issuers of debt or equity securities for the purpose of determining whether there have been violations of the Securities Act.

An acquiring party of a debenture company for purposes of regulating acquisition of the company is a person who obtains control through the purchase of stock.

A debenture company must maintain capital requirements for the debentures that it sells.  For up to $500,000 in debentures, the company must have at least $50,000 in paid-in capital.  From $500,000 to $750,000, it must have $75,000 in paid-in capital and from $750,000 to $1 million, $100,000 in paid-in capital.  In addition, for total debentures of between $1 and $10 million, the company's paid-in capital, equity reserves, and undivided profits must be five percent of outstanding securities in excess of $1 million, and two and one-half percent of the securities in excess of $10 million.  The director may waive the capital requirements.  If a waiver is granted, the company must set aside five percent of its profits each year until it can meet the capital requirements.

Debenture companies may not issue certificates in passbook form or in any form that may be withdrawn on demand.

The director may issue a cease and desist order to a debenture company which is violating or has violated the statute, a rule, or order of the director.  The cease and desist order applies to directors, officers, and employees of the company.

There is a $35 fee for an original registration as a salesperson or an investment adviser salesperson under the securities act.  The annual renewal fee is $15.

SUMMARY:

The director may examine an issuer of a debt or equity security for purposes of determining compliance with the securities act, in addition to determining whether there have been violations of the act.

An acquiring party is any person who becomes or attempts to become a controlling person of a debenture company.

The capital requirements for debenture companies are modified.  For securities issued up to $1 million, the company must have a net worth of $200,000.  In addition, for securities issued over $1 million, but less than $100 million, the company must have an additional net worth of ten percent of the outstanding securities in excess of $1 million.  For securities issued over $100 million, the company must have an additional net worth five percent of the outstanding securities over $100 million.  At least one-half of the net worth must be in cash or other liquid assets.  If the director waives the net worth requirements, the company must increase its net worth in accordance with conditions imposed by the director.

A debenture company may not issue debentures payable on demand nor that pay or accrue interest beyond the maturity date.

Cease and desist orders may be directed to controlling persons in addition to officers, directors, and employees.

A debenture company may not make equity investments in a single project exceeding ten percent of its assets or of more than its net worth, not make equity investments other than in income-producing real property exceeding 20 percent of its assets.  A debenture company may not loan or invest in loans to any one borrower more than two and one-half percent of its assets. The director may give written consent for a waiver of these limitations.  In addition, a debenture company may not have more than 20 percent of its assets in unsecured loans.

Debts of a debenture company which are one year or more past due must be charged off the books of the company unless the debt is secured and in the course of collection or is backed by bonds.

A debenture company must notify each debenture holder of the maturity date of that holder's debenture between 45 and 15 days prior to the maturity date.  The company shall send its annual financial statements or a summary of such statements to each debenture holder.

Debenture companies shall keep accounts and records that are prescribed by the director.  All such accounts and records are to be kept for three years unless otherwise prescribed by the director.  The director may adopt rules governing examinations, reports, and records that must be kept and any other rules needed to govern the administration of debenture companies.  Examination reports and information obtained in conducting examinations are not subject to public disclosure.  A court may permit an in-camera review of relevant portions of a report for a civil action.

The original application fee for a salesperson or an investment adviser salesperson is increased by $5 to $40.  The annual renewal application fee is also increased by $5 to $20.

Appropriation:    none

Revenue:    none

Fiscal Note:      available

Senate Committee - Testified: Mike Stevenson, DOL Securities Division (for); Dick Barret (for)