HBA-TBM H.B. 2255 77(R) BILL ANALYSIS Office of House Bill AnalysisH.B. 2255 By: McCall Pensions & Investments 3/11/2001 Introduced BACKGROUND AND PURPOSE The State Securities Board (board) was created in 1957 by the 56th Legislature to protect investors from securities fraud and to assure access to capital for businesses in Texas. To achieve its mission, the board registers securities offerings, licenses and inspects securities professionals, investigates fraudulent securities offerings, and enforces violations of The Securities Act. The board is subject to the Texas Sunset Act and will be abolished September 1, 2001 unless it is continued by the legislature. As a result of its review of the board, the Sunset Advisory Commission (commission) recommended the continuation of the board and made recommendations for its improvement. House Bill 2255 continues the existence of the board and implements the recommendations provided by the commission. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that rulemaking authority is expressly delegated to the State Securities Board in SECTION 1.03 (Section 43, Article 581, V.T.C.S.), SECTION 2.01 (Section 4, Article 581, V.T.C.S.), and SECTION 2.08 (Section 12-1, Article 581, V.T.C.S.) of this bill ANALYSIS House Bill 2255 amends The Securities Act to continue the State Securities Board (board) until September 1, 2013, and to set forth standard Sunset Advisory Commission recommendations regarding board member training, board member removal, standards of conduct, conflicts of interest, public representation on the board, equal employment, the designation of a presiding officer of the board by the governor, policy implementation by the board, public testimony, the maintaining of written complaints, and the development of an equal employment policy (Secs. 2 - 2-7, Art. 581, V.T.C.S.). The bill expands the membership of the board from three to five public members appointed by the governor (Sec. 2, Art. 581, V.T.C.S.). The bill provides terms of office for the two new members (SECTION 1.04). H.B. 2255 amends The Securities Act to extend criminal penalties to business entities that engage in fraud or violate registration provisions (Sec. 4, Art. 581, V.T.C.S.). The bill provides that corporate criminal penalties do not apply to unintentional violations of The Securities Act by establishing thresholds similar to those in Penal Code provisions on corporate criminal penalties (Sec. 29-3, Art. 581, V.T.C.S.). H.B. 2255 amends The Securities Act to extend civil liability provisions for securities dealers to include investment advisers who engage in fraud or violate registration provisions. The bill provides that investment advisers or firms are not liable if either the client knew of the untruth or omission or the investment adviser did not know of the untruth or omission. A person or firm who directly or indirectly controls the investment adviser is liable to the same extent as the investment adviser unless the controlling person did not know of the facts. The bill also provides a three-year limitation on the filing of lawsuits for registration violations, and a five-year limitation on lawsuits for fraud (Secs. 33 and 33-1, Art. 581, V.T.C.S.). H.B. 2255 extends the authority of the securities commissioner (commissioner) to issue a cease and desist order to include unregistered agents of securities dealers and investment advisers, and the fraudulent sales practices in which a firm or individual has engaged or is about to engage (Sec. 23, Art. 581, V.T.C.S.). H.B. 2255 authorizes the commissioner to issue an emergency cease and desist order (order) to immediately stop any fraud, fraudulent activity, or violation of The Securities Act that presents an immediate threat to the public welfare. The bill authorizes the commissioner to issue an order for the sale of nonexempt, unregistered securities, the unregistered activities of securities dealers, investment advisers and their agents, fraudulent offerings, or engaging in a practice that violates The Securities Act or a board rule. The bill provides that persons issued an emergency cease and desist order may request a hearing, and sets forth provisions for a hearing and for the commissioner to affirm, modify, set aside, or grant a stay of an order (Sec. 23-2, Art. 581, V.T.C.S.). H.B. 2255 authorizes the commissioner to conduct, without notice, inspections of the records of securities dealers and investment advisers for the purpose of ensuring compliance with The Securities Act and board rules. The bill establishes procedures for the commissioner during an inspection and requirements that a dealer or investment adviser must comply with during an inspection. The bill provides that information obtained in the inspection of the records of dealers and investment advisers is confidential. The confidentiality includes internal notes, memoranda, reports, and communications made in connection with the inspection. However, a court order may subject this information to public disclosure (Sec. 13-1, Art. 581, V.T.C.S.). The bill requires the board by rule to educate the public as part of the agency's statutory mission to protect investors and develop and implement an investor education initiative. Materials used in the education program must be provided in both English and Spanish. H.B. 2255 also grants the board specific authority to accept grants and donations for use in the board's education program and authorizes the board to collaborate with public or nonprofit entities with an interest in investor education in developing and implementing the education initiative. The bill provides that the board is subject to provisions regarding the acceptance of a gift by a state agency, including being prohibited from accepting donations from parties involved in a contested case until one month after a final decision is made. The bill authorizes the board to accept grants and donations for the education initiative from persons not affiliated with the securities industry or from a nonprofit association regardless of whether the entity is affiliated with the securities industry (Sec. 43, Art. 581, V.T.C.S.). The bill requires the investor education initiative to be implemented by December 31, 2001 (SECTION 1.05). The bill defines federally covered investment advisers and creates statutory provisions for such advisers to file notice and pay fees that are currently stipulated by board rules (Secs. 4, 12-1, 35, and 41, Art. 581, V.T.C.S.). H.B. 2255 also provides that a person who is registered as both a dealer and an investment adviser or federally covered adviser is required to pay only one fee (Sec. 42, Art. 581, V.T.C.S. and SECTION 2.22). H.B. 2255 sets forth definitions to distinguish between securities dealers and investment advisers, and between representatives of securities dealers and representatives of investment advisers and amends provisions of The Securities Act and the Education, Finance, Occupations, and Transportation codes to conform with the definitions. EFFECTIVE DATE September 1, 2001.