Montana Administrative Register Notice 6-199 No. 7   04/12/2012    
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In the matter of  the adoption of NEW RULES I, II, III, IV, V, and VI pertaining to Securities Restitution Fund






TO:  All Concerned Persons


1.  On May 8, 2012, at 10:30 a.m., the Office of the Commissioner of Securities and Insurance, Montana State Auditor, will hold a public hearing in the 2nd floor conference room, at the Office of the Commissioner of Securities and Insurance, Montana State Auditor, 840 Helena Ave., Helena, Montana, to consider the proposed adoption of the above-stated rules.


2.  The Office of the Commissioner of Securities and Insurance, Montana State Auditor (CSI), will make reasonable accommodations for persons with disabilities who wish to participate in this public hearing, or need an alternative accessible format of this notice.  If you require an accommodation, contact the CSI no later than 5:00 p.m., May 1, 2012, to advise us of the nature of the accommodation that you need.  Please contact Darla Sautter, Office of the Commissioner of Securities and Insurance, Montana State Auditor, 840 Helena Avenue, Helena, Montana, 59601; telephone (406) 444-2726; TDD (406) 444-3246; fax (406) 444-3499; or e-mail dsautter@mt.gov.


3.  The New Rules as proposed to be adopted provide as follows:


            NEW RULE I  SECURITIES RESTITUTION FUND  (1)  The purpose of these rules is to set forth:

            (a)  the procedures for allocating money from the Securities Restitution Fund to the victims of securities fraud in Montana;

            (b)  the procedures that victims shall use to apply for compensation from the fund;

            (c)  the composition of a recommendation committee and its operating procedures; and

            (d)  the method for calculating what percentage of money a victim shall be eligible for when the fund approaches zero.


            AUTH:  30-10-1008, MCA 

            IMP:  30-10-1006, MCA


REASON:  The Commissioner of Securities and Insurance, Monica J. Lindeen (commissioner), is the statewide elected official responsible for administering the Montana Securities Department and regulating the securities industry; these duties include implementation of the Securities Restitution Fund.  The commissioner is specifically charged with setting forth rules regarding fund allocation.  Furthermore, the commissioner is charged with calculating and distributing proportional payments when the fund is approaching zero.


In order to ensure there is transparency and fairness in the process for applying to the fund, it is necessary to establish a committee to make recommendations to the commissioner.


            NEW RULE II  DEFINITIONS  For purposes of this subchapter:

            (1)  "Approaching zero" means the fund balance is under $1,000,000.

            (2)  "Claimant" means a claimant as defined under 30-10-1003(1), MCA.

            (3)  "Commissioner" means the Commissioner of Securities and Insurance, Montana State Auditor.

            (4)  "Committee" means the committee defined in [NEW RULE IV].

            (5)  "Department" means the department as defined in 30-10-1003(2), MCA.

            (6)  "Eligible persons" means persons eligible for restitution assistance under 30-10-1005, MCA.

            (7)  "Fund" means the fund as defined in 30-10-1003(4), MCA.

            (8)  "Investment scheme" means the underlying plan constituting the basis of a final order in a legal action initiated by the commissioner.

            (9)  "Loss ratio" means the ratio consisting of the victim's total investment loss over the victim's total net worth.

            (10)  "Total net loss" means a person's total loss in an investment scheme.

            (11)  "Total net worth" means the difference between the total value of a person's assets and a person's liabilities.

            (12)  "Victim" means a victim as defined under 30-10-1003(6), MCA.


            AUTH:  30-10-1008, MCA

            IMP:  30-10-1008, MCA


REASON:  It is necessary for the commissioner to define the terms listed in order to give clarity to the meaning of each term as it is used in this rule.


The statutes allow for the commissioner to set up a proportional payment scheme when the fund is approaching zero, but the statutes do not specify what "approaching zero" means.  It is necessary to define this term since there is the potential for several victims from one case to deplete the fund.  While it is not possible to ensure $1,000,000 will be able to cover every claimant, the review of the history of victims who would have been eligible for assistance had this fund existed in the past five years indicates the amount is sufficient barring extraordinary circumstances.


It is necessary to define "claimant," "department," "eligible persons," "fund," and "victim" in accordance with the Securities Restitution Assistance Fund Act of Montana to ensure the same meaning is given to the terms in these rules as the Legislature promulgated in creating the fund.  Furthermore, it is necessary to ensure that the term "committee" is utilized throughout these rules to mean the committee defined by these rules and not any other committee operating under the authority of the commissioner.


In order to recognize the myriad of investment plans which a person charged with securities fraud may be a part of, it is necessary to define the particular scheme which a Montana administrative or court order addresses.  Therefore, only the plan which is particular to a final order is encompassed by these rules; any plan which is not a part of a final order is specifically excluded from determining a claimant's eligibility amount.


The commissioner uses the term "loss ratio" to assist in determining a fair and equitable distribution amount.  It is necessary to define such a term as a proportion of net worth and net amount lost under an investment scheme to ensure persons are being compensated relative to their current financial position when the fund is approaching zero.  It is further necessary to define "total net loss" and "total net worth" to ensure there is no confusion about how funds are being distributed when the fund approaches zero.


            NEW RULE III  METHOD FOR CALCULATING PERCENTAGES AS THE FUND APPROACHES ZERO  (1)  When the fund is approaching zero, the committee shall utilize loss ratio to determine how much money a person is eligible to receive, except as specified in (4).

            (2)  The committee shall use the following percentages when making recommendations to the commissioner as the fund approaches zero:

            (a)  eligible persons whose loss ratio is less than 10% are eligible for up to $2,500;

            (b)  eligible persons whose loss ratio is between 10% and 25% are eligible for up to $7,500;

            (c)  eligible persons whose loss ratio is between 25% and 50% are eligible for up to $12,500;

            (d)  eligible persons whose loss ratio is between 50% and 75% are eligible for up to $17,500; and

            (e)  eligible persons whose loss ratio is greater than 75% are eligible for the full amount under 30-10-1006(3), MCA.

            (3)  A person's eligibility for restitution does not mean he or she shall receive the amount listed.  The committee shall make recommendations which cannot exceed the amount listed.  Payments shall be limited to funds available.  Not all persons deemed eligible shall receive payment.

            (4)  The committee may waive the loss ratios in the interest of justice.


            AUTH:  30-10-1008, MCA

            IMP:  30-10-1008, MCA


REASON:  Loss ratios are given to the committee as guidelines to ensure people are treated fairly in their requests for compensation.  The fund is finite in nature and money can only be distributed in accordance with the amount actually in the fund.  Therefore, using loss ratio when the fund is approaching zero provides benchmarks to assist the committee in making its determinations.


Furthermore, just because a person is eligible for a certain amount when the fund approaches zero does not mean the person will actually receive that amount.  Amounts must be distributed in accordance with what is actually in the fund.  Because the contents of the fund may be insufficient to compensate all victims, persons eligible for restitution will not always receive restitution.  Alternatively, the committee has the discretion to recommend an amount beyond the loss ratio when there are sufficient funds to do so, or when the committee deems it to be in the interest of justice.


            NEW RULE IV  COMPOSITION OF THE COMMITTEE  (1)  The committee shall be composed of three employees of the CSI.  Those three persons shall be:

            (a)  the deputy commissioner of securities, who shall serve as chairperson;

            (b)  chief legal counsel; and

            (c)  an attorney to be appointed quarterly by the chief legal counsel.


            AUTH:  30-10-1008, MCA

            IMP:  30-10-1008, MCA


REASON:  It is necessary to involve persons on the committee who have worked on cases where restitution is possible.  The deputy securities commissioner and chief legal counsel are intricately involved in every securities action brought forth by the department.  The third member of the committee, the attorney, will have worked on securities cases for the department and is therefore in a position to review award allocations as well.  Furthermore, these three persons will be able to gauge the amount contained in the fund, the amount that may be coming into the fund, and the number of potential claimants at any given time.  This knowledge is necessary for the committee to ensure funds are adequately and justly distributed.


            NEW RULE V  COMMITTEE PROCEDURES  (1)  The committee shall meet quarterly to determine award recommendations.

            (2)  The committee shall review all completed applications received in the preceding quarter prior to making any recommendations.

            (3)  Within two weeks following the committee meeting, the attorney shall prepare a recommendation for the commissioner.

            (4)  Applications shall only be considered in two consecutive quarters.  After the second quarter review, the application shall be deemed closed and eligible for review solely at the discretion of the committee.

            (5)  The commissioner may:

            (a)  adopt the recommendations in full;

            (b)  reject the recommendations in full; or

            (c)  request another meeting of the committee to reexamine fund allocation.


            AUTH:  30-10-1008, MCA

            IMP:  30-10-1008, MCA


REASON:  It is necessary to set forth committee procedures so that all claimants understand the parameters under which the committee is working.  A quarterly meeting of the committee provides sufficient time for an application to be reviewed speedily and thoroughly.  Furthermore, allowing two weeks for the committee to prepare its report to the commissioner enables committee members to draft the report while recognizing other obligations committee members may have.


The review of applications for only two consecutive quarters is necessary to prevent the committee from reviewing the same application several times while the fund is approaching zero.  The committee can reopen the application should the fund amount increase after the initial two reviewing periods.


It is necessary for the commissioner to have discretion about the committee's findings since it is under the commissioner's name that an order directing restitution is signed.  This discretion is limited to accepting, rejecting, or requesting a reexamination of the applicants.


            NEW RULE VI  APPLICATION REVIEW REQUIREMENTS  (1)  Claimants shall submit a written application on a form prescribed by the commissioner.

            (2)  Only persons whose applications are complete and show they meet all of the eligibility requirements specified in 30-10-1005, MCA, and other relevant statutes shall have their applications reviewed by the committee.

            (3)  Incomplete applications shall be returned to the claimant.  Any request by the department for additional information must be answered within 30 days for an application to be considered by the committee in the following quarter.  Claimants failing to respond within 30 days shall not be considered in the following quarter, except for good cause shown.

            (4)  The committee shall not review more than one application per victim per investment scheme.


            AUTH:  30-10-1008, MCA

            IMP:  30-10-1006, MCA


REASON:  It is necessary to explicitly state what a claimant must do to have his or her application reviewed by the committee.  Furthermore, the application must be completed before the committee can review it.  The commissioner understands oftentimes persons inadvertently omit necessary information, and therefore a mechanism is necessary to handle incomplete applications.  Thirty days afford the claimant ample time to correct any deficiencies in an application and return the completed information to the commissioner for review.


If a person does not respond within thirty days, that person will still have the opportunity to have his or her application reviewed.  However, that review will not be in the following quarter.  This time frame is necessary to make sure the committee has ample time to review all applications prior to meeting.


The final requirement is to ensure multiple transactions within an investment scheme are considered as one.  This is necessary to prevent a person from separating their investments and seeking multiple restitution amounts, thereby depleting the fund for one victim.  This comports with statutory language denoting a maximum of $25,000 per claimant of unpaid restitution awarded in a final order.


            4.  Concerned persons may submit their data, views, or arguments concerning the proposed actions either in writing or orally at the hearing.  Written data, views, or arguments may also be submitted to Brett O'Neil, Staff Attorney, Office of the Commissioner of Securities and Insurance, Montana State Auditor, 840 Helena Ave., Helena, Montana, 59601; telephone (406) 444-2040; fax (406) 444-3499; or e-mail bo'neil@mt.gov, and must be received no later than 5:00 p.m., May 16, 2012.


            5.  Brett O'Neil, Staff Attorney, has been designated to preside over and conduct this hearing.


            6.  The CSI maintains a list of concerned persons who wish to receive notices of rulemaking actions proposed by this agency.  Persons who wish to have their name added to the list shall make a written request that includes the name and mailing address of the person to receive notices and specifies for which program the person wishes to receive notices.  Such written request may be mailed or delivered to Darla Sautter, at the Office of the Commissioner of Securities and Insurance, Montana State Auditor, 840 Helena Ave., Helena, Montana, 59601; telephone (406) 444-2726; fax (406) 444-3499; or e-mail dsautter@mt.gov or may be made by completing a request form at any rules hearing held by the agency.


            7.  An electronic copy of this Proposal Notice is available through the Secretary of State's web site at http://sos.mt.gov/ARM/Register.  The Secretary of State strives to make the electronic copy of the notice conform to the official version of the notice, as printed in the Montana Administrative Register, but advises all concerned persons that in the event of a discrepancy between the official printed text of the notice and the electronic version of the notice, only the official printed text will be considered.  In addition, although the Secretary of State works to keep its web site accessible at all times, concerned persons should be aware that the web site may be unavailable during some periods, due to system maintenance or technical problems.


            8.  Pursuant to 2-4-302, MCA, the bill sponsor contact requirements do not apply.


            /s/ Brett O'Neil                       /s/ Jesse Laslovich

            Brett O'Neil                            Jesse Laslovich

            Rule Reviewer                     Chief Legal Counsel


            Certified to the Secretary of State April 2, 2012.


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