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LEGISLATIVE UPDATE By Colleen Keefe and Manning Warren III his article briefly summarizes recently enacted amendments to the Securities Act of Kentucky (the Act).1 On April 7, 2010, Governor Beshear signed Senate Bill 130 (SB 130) into law amending KRS Chapter 292, the Act.2 SB 130 is the evolution of legislation originally crafted by the Division of Securities of the Department of Financial Institutions (the Department) and introduced in the Legislature in 2006, although it did not pass at that time. In 2010, the Department turned to Senator Thomas Buford to introduce a slightly updated version of the legislation, which was passed unanimously by both houses of the General Assembly.3 The new law is primarily a technical reorganization of the registration provisions applicable to securities professionals. The legislation also provides the Commissioner of the Department with a few new tools to combat securities fraud. In order to provide additional protection to the elderly, who are often targeted by dishonest promoters, a provision is added to double fines imposed for violations directed at those 60 and over. Perhaps the most significant of these provisions is the establishment of a Securities Fraud Prosecution and Prevention Fund. This article will discuss the specific changes that SB 130 made to the Act and the anticipated benefits of these changes. Many of the changes to the Act are T 22 Bench & Bar September 2010 consistent with similar provisions in the Uniform Securities Act of 2002, which was approved by the American Bar Association.4 This is true of the changes to KRS Section 292.330, governing the activities of broker-dealers, investment advisers, agents and investment adviser representatives. SB 130 repealed and reenacted KRS Section 292.330 in a revised form and created seven new sections to break up this once lengthy and tedious section.5 Previously, KRS 292.330 addressed the registration requirement for securities professionals, the registration process and exemptions from registration, as well as post-registration record keeping and reporting requirements. It also delineated the rulemaking and enforcement authority of the Commissioner of the Department related to those persons. As reenacted by SB 130, KRS 292.330 will simply set forth the requirement that a person defined by KRS 292.310 of the Act as a brokerdealer, investment adviser, agent, or investment adviser representative must be registered, and sets forth exemptions from that requirement. Many of these exemptions were previously provided as exceptions to the definitions of brokerdealer, investment adviser, agent, and investment adviser representative. SB 130 simply removes those exceptions from KRS 292.310 and places them in the revised KRS 292.330. In addition to reenacting Section 292.330, SB 130 created seven new sections of Chapter 292 applicable to the activities of securities professionals. The new sections describe: 1) the filing requirements to apply for registration as a securities professional;6 2) the notice filing requirements for federal “covered advisers;”7 3) the filing requirements for succession to the registration of a broker-dealer or investment adviser;8 4) the filing requirements related to termination, temporary registration, or withdrawal from registration as a securities professional;9 5) the filing fees for registration as a securities professional;10 6) the requirements for recordkeeping and reporting by a securities professional and the authority of the Commissioner to examine securities professionals and prescribe rules governing their conduct;11 and 7) the enforcement authority of the Commissioner with respect to applicants for registration as a securities professional and all other registrants.12 These amendments are expected to bring clarity to the requirements related to the Colleen Keefe currently serves as the Chief of Enforcement for the Division of Securities of the Kentucky Department of Financial Institutions. In that capacity, she oversees investigations conducted by the Division of alleged violations of the Securities Act of Kentucky and coordinates joint investigations with other state and federal agencies including those conducted in conjunction with criminal authorities. She previously served with the Department as Director of the Securities Division and as legal counsel to the Department. Ms. Keefe is a native of Lexington, Kentucky. She holds a Bachelor of Science degree in economics from the University of Kentucky and law degree also from the University of Kentucky. registration and conduct of securities professionals, while making it easier for those persons to comply with the Act. They are also expected to facilitate the day-to-day administration of these provisions by the Department’s staff. The Uniform Securities Act contains an exemption from broker-dealer registration for a broker-dealer without a place of business in Kentucky and who only deals with non-residents, often referred to as the “snowbird exemption.”13 SB 130 does not contain this Manning Gilbert Warren III holds the H. Edward Harter Chair of Commercial Law at the University of Louisville. Previously, he was Senior Fulbright Scholar and Visiting Professor of Law at the University of London, Visiting Professor of Law at the George Washington University, Emory University, and the University of Arizona, and was Professor of Law at the University of Alabama. Prior to his academic career, Professor Warren was a partner at Ritchie, Rediker & Warren and an associate at Bradley Arant Rose and White, both in Birmingham, Alabama. He is a widely published scholar in the field of corporate and securities regulation, has testified on market regulation before the United States Senate Banking Committee, and has served as a consultant to the London Stock Exchange and the North American Securities Administrators Association. He also has served as a member of the U.S. Securities and Exchange Commission’s Federal Advisory Committee on Market Transactions and as a director of the American Judicature Society, and is an active member of the American Law Institute. Professor Warren was formerly Chair of the Business Law Section of the Kentucky Bar Association. specific language, but Kentucky provides this exemption in a regulation based on the Commissioner’s general authority to exempt persons from broker-dealer registration by rule or order.14 Similarly, the Uniform Securities Act provides that the securities administrator may by rule or order exempt foreign registered broker-dealers.15 In Kentucky, this exemption is provided by an order.16 Finally, the Uniform Securities Act exempts out-ofstate registered broker-dealers who have three or fewer customers in a particular state during a twelve-month period.17 The exemption in SB 130 is not as broad and exempts such brokerdealers only if they make 15 or fewer offers or sales in Kentucky during a twelve-month period.18 Other amendments of note include a change to KRS 292.380(6) related to the registration of securities by notification, coordination or qualification.19 This amendment limits the initial effective period of a registration statement to one year and requires the annual renewal of a registration statement for securities offered beyond the initial year. In addition, a new paragraph is added to KRS 292.480 providing for a private action for fraudulent investment advice, regardless of whether the person giving the advice also offered or sold a security.20 The person so defrauded may bring an action to recover both the consideration paid for the advice and the amount of actual damages caused by the fraudulent conduct. Finally, the Commissioner’s authority at KRS 292.500(14) to impose civil fines is amended to allow the Commissioner to impose a fine of up to $20,000 for each violation of the Act.21 If a violation is directed at a person age 60 or over, the Commissioner may impose an additional fine of up to $20,000 per violation.22 Related to this amendment is a new section which will allow the Commissioner to direct a portion of these fines into a newly established Securities Fraud Prosecution and Prevention fund.23 Expenditures from the fund may be used to assist in criminal prosecution of fraudulent activities, for training and equipment related to prevention, detection, and investigation of securities fraud, and for investor education. It is hoped that these changes will provide the Commissioner with additional tools to protect the most vulnerable members of the investing public and make violations of the Act less profitable for dishonest promoters, issuers and securities professionals. ENDNOTES 1. These amendments have an effective date of July 15, 2010. See Atty. Gen. Op. 10-002. 2. 2010 Acts, ch. 82. 3. S.B. 130, Introduced February 2, 2010. Reported formally by Senate Banking and Insurance Committee on March 9, the Committee Substitute was approved by the Senate on March 16. The bill was approved by the House Banking and Insurance Committee on March 24 and was approved by the entire House on March 26. 4. 7C U.L.A. 22. The complete text, with comments, of the Uniform Securities Act of 2002 (“USA”) is available as well at NCCUSL.org. 5. 2010 Act, ch. 82, § 2. 6. 2010 Act, ch. 82, § 3. 7. 2010 Act, ch. 82, § 4. 8. 2010 Act, ch. 82, § 5. 9. 2010 Act, ch. 82, § 6. 10. 2010 Act, ch. 82, § 7. 11. 2010 Act, ch. 82, § 8. 12. 2010 Act, ch. 82, § 9. 13. USA § 401(b), 7C U.L.A 102. 14. 808 KAR 10:310 (2009). 15. USA § 401(d)(1), 7C U.L.A. 103. 16. Registration Exemption for Certain Canadian Broker-Dealers and Agents, Or. of Ky. Dept. Of Fin. Instns. (Oct. 12, 2006). 17. USA § 401(b)(1)(G), 7C U.L.A. 103. 18. KRS § 292.330(2)(c) as amended by 2010 Acts, ch. 82 § 2. 19. 2010 Act, ch. 82, § 10. 20. KRS § 292.480(7), created by 2010 Acts, ch. 82 § 12. 21. KRS § 292.500(14) as amended by 2010 Acts, ch. 82 § 13. September 2010 Bench & Bar 23