Commissioner’s Release: 102-C (Revised)

FAIRNESS HEARINGS UNDER THE CORPORATE SECURITIES LAW OF 1968 AFTER THE ENACTMENT OF THE NATIONAL SECURITIES MARKETS IMPROVEMENT ACT OF 1996

Pete Wilson, Governor
Date: December 1, 1998

Dale E. Bonner, Commissioner

This release, as revised, supersedes Release No. 102-C dated December 4, 1996. As revised, this release discusses a recent amendment to the Securities Act of 1933 (“Securities Act”) as well as the National Securities Markets Improvement Act of 1996 (the “NSMIA”) and their impact on the Department of Corporations’ (“Department”) authority to conduct “fairness” hearings under Section 25142 of the Corporations Code.

“FAIRNESS” HEARINGS HELD IN CONNECTION WITH THE EXEMPTION UNDER SECTION 3 (a) (10) OF THE SECURITIES ACT OF 1933

When the NSMIA was enacted, the question arose as to whether Section 18(b)(4)(C) (15 U.S.C. 77r(b)(4)(C)) of the Securities Act as amended by the NSMIA had the effect of preempting the Department from holding a fairness hearing under Section 25142 of the Corporations Code (or a California court from conducting a hearing) to effect the exemption from registration under Section 3 (a) (10) of the Securities Act. Based on the efforts of the Department and other interested parties to clarify this ambiguity, Congress recently enacted legislation (the Securities Litigation Uniform Standards Act of 1998; Public Law 105-353, effective November 3, 1998) that, among other things, amends Section 18(b)(4)(C) of the Securities Act (specifically, Sec. 302 of the Securities Litigation Uniform Standards Act of 1998) to expressly remove the exemption from federal registration afforded by Section 3 (a) (10) of the Securities Act from the provisions of the NSMIA. As it has in the past, the Department will continue to hold fairness hearings in connection with this exemption from federal registration irrespective of whether a security is a “covered” security or not.

“FAIRNESS” HEARINGS HELD AFTER THE ENACTMENT OF THE NSMIA (OTHER THAN THOSE HELD IN CONNECTION WITH THE EXEMPTION UNDER SECTION 3 (a) (10) OF THE SECURITIES ACT of 1933)

This release also serves as notice that, upon request, the Department will continue to hold hearings under Section 25142 irrespective of whether the security is a “covered security” included under any subdivision of Section 18(b) of the NSMIA. The Department’s reasons for the above stated position are as follows:

Section 18(a) of the Securities Act, as added by the NSMIA preempts state laws that require registration or qualification of securities or securities transactions. Section 25142 does not require a hearing to determine the fairness of a securities transaction, rather, Section 25142 merely authorizes the Commissioner of Corporations, upon request, to approve the fairness of the terms and conditions of the issuance of securities and to hold a hearing when an application for a permit under the Corporate Securities Law of 1968 is filed with the Department.

The voluntary nature of a Section 25142 hearing is underscored by the fact that Section 25142 authorizes such actions whether or not the security or transaction is exempt from federal registration under the Securities Act.

WILLIAM KENEFICK
Assistant Commissioner
Office of Policy