In late February, Senator Jerry Hill introduced a bill, SB 538, to substantially amend the Franchise Investment Law.  A few days later, the bill was read for the first time and set for hearing by the Senate Banking and Financial Institutions Committee on April 3.  Then something very fishy happened.   Two days before the hearing, Senator Hill gutted the bill and substituted numerous amendments to the Corporate Securities Law of 1968.  The Committee then passed the bill out on an 8-0 vote.

This is not a belated Pesce d’Aprile scherzo.  It is an illustration of how the legislature routinely deprives the public of the opportunity to have meaningful input with respect to pending legislation.  The policy committees in each house of the legislature are the places where bills typically receive their most substantive scrutiny.  By gutting and amending SB 538 two days before the scheduled hearing, Senator Hill has successfully maneuvered his bill past the first policy committee without meaningful public notice.

The bill in its present form would make dramatic changes to the Corporate Securities Law and the Commissioner’s authority.  Among other things, the bill would completely rewrite Corporations Code Section 25401 which currently declares it unlawful for any person to offer or sell a security in this state or buy or offer to buy a security in this state by means of any written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.  The bill would amend Section 25401 so that it mirrors Rule 10b-5.

While conformity with federal law may be desirable, it raises important issues.  For example, California has a statute that bans insider trading (Section 25402). See California and Rule 10b5-1.  The federal courts read insider trading liability under Securities Exchange Act  of 1934 into Section 10(b) of the Securities Exchange Act  and Rule 10b-5. Will the enactment of Rule 10b-5 result in the importation of the judge-made federal law of insider trading into California law?

SB 538 would make several other changes to the Corporate Securities Law, including:

  • The imposition of a $35 annual renewal fee on broker-dealers;
  • Authorizing the Commissioner to issue desist and refrain orders for securities law violations involving insider trading, aiding and abetting, falsifying information, and other violations; and
  • Authorizing the Commissioner to convert administrative desist and refrain orders into civil judgments.

It is unfortunate that the author has chosen to rush these significant changes through the Senate policy committee without meaningful public notice or scrutiny.