5184-S2

AN ACT Relating to the securities brokers recovery account; adding a new chapter to Title 21 RCW; prescribing penalties; and providing an effective date.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

NEW SECTION. Sec. 1. Unless the context clearly requires otherwise, the definitions in this section apply throughout this chapter.

(1) "Application" means an application filed under section 4 of this act.

(2) "Department" means the department of financial institutions.

(3) "Director" means the director of financial institutions.

(4) "Recovery account" means the securities brokers recovery account created under section 2 of this act.

(5) "Registered person" means a broker-dealer, salesperson, investment adviser, or investment adviser salesperson registered under the securities act of Washington, chapter 21.20 RCW.

NEW SECTION. Sec. 2. The securities brokers recovery account is created in the state treasury. All receipts from collections made under this chapter shall be deposited into the account. Expenditures from the account may be used only for the purposes designated under this chapter, including those expenses incurred by the department in administering this chapter. Only the director or the director's designee may authorize expenditures from the account. The account is subject to allotment procedures under chapter 43.88 RCW, but no appropriation is required for expenditures.

NEW SECTION. Sec. 3. A registered person shall pay a fee of twenty-five dollars in addition to the registration fee when applying for or upon the renewal of a license under chapter 21.20 RCW. The department shall deposit the fee collected under this section into the recovery account. If the balance of the recovery account is more than five hundred thousand dollars on June 30th of any year, the director shall establish the fee payable under this section, but in no case may the fee be greater than twenty-five dollars. In setting the fee, the director shall consider anticipated future claims on and expenses of the recovery account.

NEW SECTION. Sec. 4. (1) Within the limitations specified in section 15 of this act, a claimant may file an application with the department for payment from the recovery account of the amount unpaid on a judgment in an action or entered on an arbitration award that represents an actual and direct loss to the claimant in a transaction or account. The judgment must be a final judgment in a court of competent jurisdiction. The judgment must include findings of fact and conclusions of law based on intentional fraud, misrepresentation, deceit, or conversion of trust funds, by a registered person, including a person under suspension proceedings, or a formerly registered person who holds himself or herself out as a registered person. The judgment must also be based on acts or omissions arising directly out of a transaction or account in which the person performed acts for which registration under chapter 21.20 RCW was required or appropriate.

(2) The application must be delivered in person or by certified mail to the department not later than one year after the judgment became final.

(3) The application must be made on a form prescribed by the department, verified by the claimant, and include the following:

(a) The name and address of the claimant;

(b) If the claimant is represented by an attorney, the name, business address, and telephone number of the attorney;

(d) A detailed narrative statement of the facts in explanation of the allegations of the complaint upon which the underlying judgment is based;

(e) A statement by the claimant, signed under penalty of perjury, that the complaint upon which the underlying judgment is based was prosecuted conscientiously and in good faith. As used in this section, "conscientiously and in good faith" means that a party potentially liable to the claimant in the underlying transaction or account was not intentionally and without good cause omitted from the complaint, that a party named in the complaint who otherwise reasonably appeared capable of responding in damages was not dismissed from the complaint intentionally and without good cause, and that the claimant employed no other procedural tactics contrary to the diligent prosecution of the complaint in order to provide access to the recovery account;

(f) The name and address of the judgment debtor or, if those are not known, the names and addresses of persons who may know the judgment debtor's present location; and

(g) The following representations and information from the claimant:

(i) That the claimant is not a relative of the judgment debtor;

(ii) That the claimant has complied with all of the requirements of this chapter;

(iii) That the judgment underlying the claim meets the requirements of subsection (1) of this section;

(iv) A description of searches and inquiries conducted by or on behalf of the claimant with respect to the judgment debtor's assets liable to be sold or applied to satisfaction of the judgment, an itemized valuation of the assets discovered, and the results of actions by the claimant to have the assets applied to satisfaction of the judgment;

(v) That the claimant has diligently pursued collection efforts against other judgment debtors and all other persons liable to the claimant in the transaction that is the basis for the underlying judgment; and

(vi) That the application was mailed or delivered to the department no later than one year after the underlying judgment became final.

(4) The application form must include detailed instructions with respect to documentary evidence, pleadings, court rulings, and the products of discovery in the underlying litigation, all of which must be appended to the application.

NEW SECTION. Sec. 5. (1) To continue with a claim, the claimant shall serve a copy of the notice prescribed in subsection (3) of this section upon the judgment debtor by personal service or by registered mail, together with a copy of the application, no later than fifteen days after submission of the application.

(2) If the judgment debtor is currently registered under chapter 21.20 RCW, service of the notice and a copy of the application may be made by registered mail addressed to the judgment debtor at the latest business or residence address on file with the department. If the judgment debtor is not currently registered under chapter 21.20 RCW and personal service cannot be effected through the exercise of reasonable diligence, the claimant shall serve the judgment debtor by one publication of the notice in each of two successive weeks in a newspaper of general circulation published in the county in which the judgment debtor was last known to reside.

(3) The notice served upon the judgment debtor must include the following statement:

"NOTICE: Based upon a judgment entered against you in favor of . . . . . . (name of claimant), application for payment from the securities brokers recovery account is being made to the department of licensing.

"If payment is made from the securities brokers recovery account, all registrations and registration rights that you have under the securities act of Washington, chapter 21.20 RCW, will be automatically suspended on the date of payment and cannot be reinstated until the recovery account has been reimbursed for the amount paid plus interest at the prevailing interest rate.

"If you wish to contest payment by the director of licensing, you must file a written response to the application addressed to the department of licensing at . . . . . ., within thirty days after mailing, delivery, or publication of this notice and send a copy of that response to the claimant. If you fail to do so, you waive your right to present your objections to payment."

(4) If a judgment debtor fails to file a written response to the application with the department within forty-five days after personal service, mailing, or final publication of the notice, the judgment debtor is not entitled to subsequent notice of an action taken or proposed to be taken by the director with respect to the claim.

NEW SECTION. Sec. 6. (1) If the director determines that the application as submitted by the claimant fails to comply with substantially all of the requirements of section 4 of this act, or any rule adopted by the director, the director shall, within forty-five days after receipt of the application, mail an itemized list of the failures to the claimant.

(2) The time within which the director is required to act under section 7 of this act is measured from the date of receipt by the department of an application that is substantially complete. The claimant may immediately file the claim with the court under section 11 of this act when there is an irreconcilable dispute between the claimant and the director on the question of whether the application is substantially complete.

NEW SECTION. Sec. 7. (1) The director shall render a final written decision on a completed application within ninety days after it has been received unless the claimant agrees in writing to extend the time within which the director may render a decision. If the director fails to render a written decision in response to the claim within ninety days after its receipt or within the extended period agreed to by the claimant, the claim is denied by the director on the final day available for rendering the decision.

(2) The director may deny or grant the application, or may enter into a compromise with the claimant to pay less in settlement than the full amount of the claim. The director shall make a written decision to deny the claim, or the claim is denied if a written decision is not rendered within the time specified in subsection (1) of this section, if the claimant refuses to accept a settlement of the claim offered by the director. Evidence of settlement offers and discussions between the director and the claimant are not competent evidence in judicial proceedings undertaken by the claimant under section 11 of this act.

NEW SECTION. Sec. 8. The department may use all appropriate means of investigation and discovery available to it under chapter 21.20 RCW in its consideration and investigation of an application.

NEW SECTION. Sec. 9. (1) The director shall give notice of a decision rendered with respect to the claim to the claimant and to a judgment debtor who has filed a timely response to the claim in accordance with section 5 of this act.

(2) If the application is denied, the notice to the claimant and judgment debtor must include the following:

"Claimant's application has been denied. If the claimant wishes to pursue the application in court, the claimant must file the application in the court in which the underlying judgment was entered no later than six months after receipt of this notice, under section 11 of this act."

(3) If the decision of the director is to make a payment to the claimant out of the recovery account, the director shall give the following notice to the judgment debtor along with a copy of the decision of the director:

"The decision of the director of licensing on the claim of . . . . . . is to pay $. . . . . . from the securities brokers recovery account. A copy of that decision is enclosed.

"Under section 17 of this act, all of your registrations and registration rights under the securities act of Washington, chapter 21.20 RCW, will be suspended effective on the date of payment, and you will not be eligible for reinstatement of registration issued under the securities act of Washington until you have reimbursed the recovery account for this payment plus interest at the prevailing legal rate.

"If you desire a judicial review of the suspension of your registrations and registration rights, you may petition the superior court in the county in which the judgment that is the basis of this claim was rendered for a writ of mandamus. To be timely, the petition must be filed with the court within thirty days of receipt of this notice."

NEW SECTION. Sec. 10. Prior to the rendering of a decision on a claim, if the director determines that the aggregate valid claims of all aggrieved persons against the registered person are likely to exceed the limits of liability under section 15 of this act, the director shall initiate a proration proceeding instead of further administrative proceedings under section 16 of this act in a court of competent jurisdiction in which a judgment meeting the requirements of section 4 of this act has been entered against the registered person.

NEW SECTION. Sec. 11. (1) A claimant against whom the director has rendered a decision denying an application under section 4 of this act may, within six months after receipt of notice of the denial, file a verified complaint in the court in which judgment was entered in favor of the claimant for an order directing payment out of the recovery account based upon the grounds set forth in the claimant's application to the director.

(2) A copy of the verified complaint must be served upon the director and upon the judgment debtor. The claimant shall file with the court a certificate or affidavit of service. Service on the director may be made by registered mail addressed to the headquarters office of the department. Service upon a judgment debtor may be made in accordance with section 5 of this act. The notice served upon the judgment debtor shall read as follows:

"NOTICE: A complaint has been filed with the court for a payment from the securities brokers recovery account that was previously denied by the director of financial institutions.

"If the department of financial institutions makes a payment from the securities brokers recovery account under a court order, all of your registrations and registration rights under the securities act of Washington, chapter 21.20 RCW, will be automatically suspended until the recovery account has been reimbursed by you for the amount paid plus interest at the prevailing rate.

"If you wish to defend in court against this claim, you must file a written response with the court within thirty days after having been served with a copy of the complaint. If you do not file a written response, you will have waived your right to defend against the claim."

NEW SECTION. Sec. 12. (1) The director and the judgment debtor each have thirty days after being served with the complaint in which to file a written response. The court shall subsequently set the matter for hearing upon the petition of the claimant. The court shall grant a request of the director for a continuance of as much as thirty days and may, upon a showing of good cause by a party, continue the hearing for a time the court finds appropriate.

(2) At the hearing, the claimant shall establish compliance with section 4 of this act.

(3) If the judgment debtor fails to file a written response to the complaint, the claim may be compromised or settled by the director at any time during the court proceedings and the court shall, upon joint petition of the complainant and the director, issue an order directing payment out of the recovery account.

NEW SECTION. Sec. 13. Whenever the court proceeds upon a complaint under section 11 of this act, it shall order payment out of the recovery account only upon a determination that the aggrieved party has a valid cause of action under section 4 of this act and has complied with section 11 of this act.

The director may defend an action under section 11 of this act on behalf of the recovery account and has recourse to all appropriate means of defense and review, including examination of witnesses and the right to relitigate material and relevant issues in the proceeding against the recovery account that were determined in the underlying action on which the judgment in favor of the complainant was based. If the judgment in favor of the complainant was by default, stipulation, consent, or when the action against the registered person was defended by a trustee in bankruptcy, the complainant has the burden of proving that the cause of action against the registered person was for fraud, misrepresentation, deceit, or conversion of trust funds. Otherwise, the judgment creates a rebuttable presumption of the fraud, misrepresentation, deceit, or conversion of trust funds by the registered person, that presumption affecting the burden of producing evidence.

The director may move the court to dismiss the complaint when it appears there are no triable issues and the petition is without merit. The motion may be supported by affidavit of anyone having knowledge of the facts, and may be made on the basis that the petition, and the judgment referred to in the petition, does not form the basis for a meritorious recovery claim under section 4 of this act. However, the director shall give written notice at least ten days before the motion.

The director may, subject to court approval, compromise a claim based upon the complaint of an aggrieved party. The director is not bound by a compromise or stipulation of the judgment debtor.

NEW SECTION. Sec. 14. The judgment debtor may defend an action against the recovery account on his or her own behalf and has recourse to all appropriate means of defense and review, including examination of witnesses. Matters finally adjudicated in the underlying action including, but not limited to, the issues of fraud, misrepresentation, deceit, or conversion of trust funds are conclusive as to the judgment debtor and the complainant in the proceeding against the recovery account.

NEW SECTION. Sec. 15. (1) The maximum liability of the recovery account may not exceed twenty-five thousand dollars per transaction and one hundred fifty thousand dollars per registered person regardless of the number of persons aggrieved or securities involved in a transaction or the number of judgments against a registered person.

(2) When more than one registered person is involved in a transaction and the individual conduct of two or more of the registered persons results in a judgment meeting the requirements of section 4(1) of this act, the claimant may seek recovery from the recovery account based on the judgment against any of the registered persons, subject to this section and section 4(3)(g)(v) of this act.

NEW SECTION. Sec. 16. If the amount of liability of the recovery account under section 15 of this act is insufficient to pay in full the valid claims of all aggrieved persons by whom claims have been filed against a registered person, the amount must be distributed among them in the ratio that their respective claims bear to the aggregate of the valid claims, or in another manner as the court deems equitable. Distribution of moneys must be among the persons entitled to share therein, without regard to the order of priority in which their respective judgments may have been obtained or their claims have been filed. Upon petition of the director, the court may require all claimants and prospective claimants against one registered person to be joined in one action, to the end that the respective rights of all claimants to the recovery account may be equitably adjudicated and settled.

NEW SECTION. Sec. 17. If the director pays from the recovery account an amount in settlement of a claim or toward satisfaction of a judgment against a registered person, the department shall automatically suspend the registered person's registration on the date of payment from the recovery account subject to the registered person's right to file a petition with the superior court in the county from which the underlying judgment was rendered for a writ of mandamus. The registered person has this right to petition notwithstanding chapter 34.05 RCW. A registered person may not be granted reinstatement until he or she has repaid in full, plus interest at the prevailing applicable legal rate, the amount paid from the recovery account on his or her account. A discharge in bankruptcy does not relieve a person from the penalties and disabilities provided in this chapter.

NEW SECTION. Sec. 18. If the money deposited in the recovery account is insufficient to satisfy an authorized claim or portion of a claim, the director shall, when sufficient money has been deposited in the recovery account, satisfy the unpaid claim or portion in the order that the claim or portion was originally filed.

NEW SECTION. Sec. 19. A person or the agent of a person may not file with the director a notice, statement, or other document required under this chapter that is false, untrue, or contains a willful, material misstatement of fact. A violation of this section constitutes a public offense punishable by imprisonment for a period of not more than one year or a fine of not more than one thousand dollars, or both.

NEW SECTION. Sec. 20. When the director has paid from the recovery account a sum to the judgment creditor, the director is subrogated to the rights of the judgment creditor to the extent of the amount paid by the director from the recovery account and the judgment creditor shall assign his or her right, title, and interest in the judgment to the director to that extent, and an amount and interest recovered by the director on the judgment shall be deposited in the recovery account.

NEW SECTION. Sec. 21. The failure of an aggrieved person to comply with this chapter constitutes a waiver of the person's rights under this chapter.

NEW SECTION. Sec. 22. This chapter does not limit the authority of the director to take disciplinary action against a registered person for any violation of chapter 21.20 RCW or any rule or order of the director. The repayment in full of obligations to the recovery account by a registered person does not nullify or modify the effect of another disciplinary proceeding brought under the securities act of Washington.

NEW SECTION. Sec. 23. The director may adopt rules necessary or appropriate for the enforcement of this chapter.

NEW SECTION. Sec. 24. Sections 1 through 23 of this act shall constitute a new chapter in Title 21 RCW.

NEW SECTION. Sec. 25. If any provision of this act or its application to any person or circumstance is held invalid, the remainder of the act or the application of the provision to other persons or circumstances is not affected.

NEW SECTION. Sec. 26. This act takes effect July 1, 1995.