FINAL BILL REPORT

SHB 1525

                                  C 244 L 88

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

SYNOPSIS AS ENACTED

BACKGROUND:

Debenture companies are defined by law as those entities that 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.  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 if 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.  For debentures of $500,000 to $750,000, it must have $75,000 in paid-in capital and for debentures of $750,000 to $1 million it must have $100,000 in paid-in capital.  For total debentures of between $1 and $10 million, the company must have, in addition, 5 percent paid-in capital for securities in excess of $1 million.  The company must have 2-1/2 percent paid-in capital for securities in excess of $10 million.  The director may waive the capital requirements.  If a waiver is granted the company must set aside 5 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Debenture companies may not issue certificates in passbook form or in any form that may be withdrawn on demand.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 the statute, a rule or an 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 securities salesperson or an investment adviser salesperson under the securities act.  The annual renewal fee is $15.

SUMMARY:

In determining whether there have been violations of the securities act the director may examine an issuer of a debt or equity security.

An acquiring party of a debenture company is any person who becomes or attempts to become a controlling person in the 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.  For securities issued over $1 million, but less than $100 million, the company must have an additional net worth of 10 percent of the securities in excess of $1 million.  For securities issued over $100 million, the company must have an additional net worth 5 percent of the 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 accrue interest beyond the maturity date.

Cease and desist orders may be directed to controlling persons in addition to the officers, directors and employees of a debenture company.

A debenture company may not make equity investments in a single project exceeding 10 percent of its assets or of more than its net worth, and may 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 more than 2-1/2 percent of its assets to any one borrower.  The director may give written consent for a waiver of these limitations.  A debenture company may not have more than 20 percent of its assets in unsecured loans.

Debts of a debenture company that 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 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 an annual report to each debenture holder.

Debenture companies shall keep accounts and records that are prescribed by the director. The director may adopt rules governing examinations, reports and records that must be kept.  Examination reports and information obtained in conducting examinations are not subject to public disclosure.

The original application fee for a securities salesperson or an investment adviser salesperson is increased from $35 to $40.  The renewal application fee is also increased from $15 to $20.

VOTES ON FINAL PASSAGE:

      House 91   0

      Senate    48     0

EFFECTIVE:July 1, 1988