Corporate & Securities Law

By Jim Hamilton

California Provides Guidance on BD Licensing Requirements for Issuers' Directors and Officers Effecting Securities Transactions without Receiving Commissions following People v. Cole

California's policy on broker-dealer licensing for an issuer's officers or directors who effect securities transactions without receiving a commission was clarified in a release in light of the recent California Appellate Court case People v. Cole.

In People v. Cole, 156 Cal. App. 4th 452 (2007), the California Court of Appeal held that a good faith belief that a broker-dealer license was not required provided an affirmative defense to charges that the defendants sold securities without a license. Analogizing to the California Supreme Court's 2006 decision in People v. Salas, which involved the sale of unregistered securities, the appellate court ruled that the unlawful sale of securities without a license is a general intent crime, and not a strict liability offense. The appellate court concluded, therefore, that an unlicensed broker-dealer who participates in a securities transaction can defend himself on the basis of a reasonable and good faith belief that he was excluded from either: (1) the licensing requirement; or (2) the statutory definition of a broker-dealer. As a result, the trial court's failure to instruct the jury on this defense required reversal of the defendants' convictions on those counts on which they met their initial burden of proof. The appellate court rejected, however, the defendants' argument that they were excluded altogether from the definition of "broker-dealer" under the California Corporate Securities Law because they were corporate officers and directors who sold promissory notes in their own entities. The defendants did not fall within the exclusion for "agents" of an issuer, the appellate court held, because they did not did not receive commissions for the sale of the securities. The appellate court ruled that the clear and unambiguous language of the statute differentiates between corporate officers and directors who receive commissions and those who do not. Moreover, allowing individuals to set up a corporation and sell securities without registration would conflict with the licensing statute's purpose of protecting investors, the appellate court stated.

Under the California Securities Law of 1968, an issuer's officer or director can be: (1) Included in the "broker-dealer" definition if he or she engages in the business of effecting securities transactions; (2) Excluded from the "broker-dealer" definition if he or she does not engage in the business of effecting securities transactions; (3) An agent, if he/she is included in the "broker-dealer" definition and receives a commission specific to effecting securities transactions; or (4) Excluded from the "broker-dealer" definition if he or she engages in the business of effecting securities transactions but does not receive a commission specific to effecting securities transactions.

The California Department of Corporation's position is that the Cole decision has limited impact and should not be read to stand for the proposition that an issuer's officers or directors must be licensed as broker-dealers or broker-dealer agents unless they receive a commission for selling securities. The Department believes that licensing requirements are essential to investor protection but that an overly broad reading of Cole would frustrate the Department's ability to effectively enforce licensing requirements and create tremendous burdens on businesses without providing corresponding investor protection.

Analysis of People v. Cole attributed to John Jascob, Associate Writer Analyst, CCH, Inc.

The entire release is at http://www.corp.ca.gov/Commissioner/Releases/pdf/119C.pdf

Full post as published by Jim Hamilton's World of Securities Regulation on November 04, 2008 (boomark / email).