Relationship between Administrative Procedures Act and Securities Act

Subject:

Requested By: Stephen M. Wallis Deputy Securities Administrator (acting)

(1) Question: G.S. 150B-1(c) states that the Administrative Procedure Act ("APA") applies to every agency except to the extent and in the particulars that any statute makes specific provisions to the contrary. Are the provisions of Chapter 78A stated with the specificity and particularity sufficient to take precedence over any similar provisions of the APA which might conceivably apply to the actions and proceedings addressed by the Securities Act?

Conclusion: No. Chapter G.S. 150B applies to the Secretary of State in the execution of the duties delegated in Chapter 78A. To be entirely exempt from Chapter 150B through G.S. 150B-1(c), the agency must either be listed in G.S. 150B-1(d) or have a specific statement of exemption from Chapter 150B in its enabling legislation. Neither basis for exemption exists for Chapter 78A. G.S. 150B1(c) does have the additional effect of causing any applicable provisions of Chapter 150B which cannot be reconciled with provisions of Chapter 78A to fail in favor of Chapter 78A.

(2) Question Does the registration of securities dealers and salesmen by the Securities Division pursuant to

G.S. 78A-37 constitute the granting of an "occupational license" within the meaning of G.S. 150B-2(4a)?

Conclusion: Yes. G.S. 78A-36 makes it unlawful to engage in the business of affecting transactions in securities without being registered with the Secretary of State. That registration is encompassed by the definition of "occupational license" at G.S. 150B-2(4a) in that registration confers the right or privilege to engage in a field of endeavor regulated by an occupational licensing agency.

(3) Question Is the Securities Division an "occupational licensing agency" within the meaning of G.S. 150-B2(4b)?

Conclusion: Yes. The final provision of G.S. 150B-2(4b) is the significant limitation which requires some review: "Occupational licensing agency does not include State agencies or departments which may as only a part of their regular function issue permits or licenses." The critical term is "agency". The definition of "agency" includes Council of State members and divisions within their departments G.S. 150B-2(1). While Chapter 150B does not define the term "division", it is defined at G.S. 143B-3(6) as "the principal subunit of a principal State department." G.S. 143B11 makes it clear that a department may have numerous divisions. Since the principal function of the Securities Division is the regulation of securities dealers and salesmen, it is an "occupational licensing agency" as that term is defined in G.S. 150B-2(4b).

(4) Question If the Securities Division is determined to be an "occupational licensing agency" within the meaning of G.S. 150-2(4b), do the provisions of Article 3A of Chapter 150B (procedure for conduct of administrative hearings by occupational licensing agencies) in any way restrict or modify the following provisions of the Securities Act:

(a)

G.S. 78A-39(a) and (c) (Administrator’s power to institute proceedings to deny, suspend, or revoke the registration of a securities dealer or salesman);

(b)

G.S. 78A-39(e) (Administrator’s power to revoke, suspend, or impose conditions upon a withdrawal from registration as a securities dealer or salesman);

(c)

G.S. 78A-39(f) (procedure for actions by the Administrator pursuant to 78A-39);

(d)

G.S. 78A-45(a) (power of the Administrator to delegate authority to conduct hearings and to issue final agency orders and decisions); and

(e)

G.S. 78A-46(b) (Administrator’s power to require testimony by witnesses and production of evidence in investigations and proceedings)?

Conclusion: No. To the extent possible, the statutes must be read as harmonious texts. In re Halifax Paper Co., 259 NC 589, 131 SE2d 441 (1963). To the extent the two are irreconcilable, G.S. 150B-1(c) causes Chapter 78A to control. Article 3A of Chapter 150B is primarily a set of procedures for the conduct of contested case proceedings by occupational licensing agencies. Most such agencies had and continue to have some statutes establishing procedures. Normally, those statutes are less specific than Article 3A.

(a)

The procedural component of G.S. 78A-39 is found in paragraph (f). There is no irreconcilable conflict between it and Article 3A. Since G.S. 78A-45 limits the delegation of the final agency decision power to the Deputy Securities Administrator, no other employee may hold a contested case hearing. State ex rel Commissioner of Insurance v. North Carolina Rate Bureau, 61 NC App 261, 300 SE2d 586, cert. denied, 308 NC 548, 304 SE2d 242 (1983). If the Deputy Securities Administrator elects, he can send the matter to the Office of Administrative Hearings for the conduct of a contested case hearing. G.S. 150B-40(e).

(b)

G.S. 78A-39(e) embraces two distinct circumstances: voluntary withdrawal from registration and forced withdrawal of a registration as a sanction. For the second circumstance, Article 3A applies to the extent it is consistent with G.S. 78A-39. No substantial conflicts between the two statutes appear to exist.

(c)

The only apparent conflict between G.S. 78-39(f) and G.S. 150B-40(b) is the requirement that a majority of the agency final decision makers conduct the hearing. In this instance, G.S. 78A-39 will prevail. The "majority of the agency" criteria must be read to be satisfied when an agency head, such as the Director of the Securities Division, has final decision authority and conducts the contested use proceeding.

(d)

The quasi-judicial powers embodied in Chapter 78A may only be delegated to the Deputy Securities Administrator. Ministerial functions, as opposed to judicial functions, may be delegated to other employees. Ministerial functions include the conduct of hearings other than contested case hearings such as show cause hearings. The procedures and limitations in Chapter 150B apply to contested case proceeding and rulemaking hearings, the conduct of which is a ministerial function. It does not apply to other hearings the Division may conduct under Chapter

G.S. 78A.

(e)

G.S. 78A-46 is the equivalent of grand jury proceedings. So long as the exercise of these powers does not result in action on a registration without an opportunity to be heard under G.S. 78A-39, it is not a function to which Chapter 150B has any application.

(5)Are determinations made by the Administrator pursuant to his statutory authority considered "contested cases" within the meaning of G.S. 150B-2(2) if such determinations control or restrict the activities of dealers, salesmen, or issuers of securities, and if so, do these determinations become "contested cases" only if the Administrator’s action is "disputed" by the subject of such determination?

Question

Conclusion Yes. Any decision affecting the activities of a dealer, salesman or issuer, such as revocation of a dealer’s registration, may be the subject of a "contested case." Those decisions do not become "contested cases" until they are disputed, however.

(6) Question Are the requirements (in G.S. 150B-3(c)) that an agency make a finding that the "public health, safety, or welfare requires emergency action" prior to a summary suspension of a license or an occupational license, and that the agency incorporate such finding in its order of suspension, in any way in conflict with the findings required to be made by the Administrator by G.S. 78A39(a) prior to denying, suspending, or revoking the registration of a securities dealer or salesman and by G.S. 78-29(a) prior to denying, suspending, or revoking the effectiveness of a securities registration statement?

Conclusion: No. The statutory standards embodied in G.S. 78A-39(a) and 29(a) are the public health, safety or welfare criteria which must be considered prior to and upon which a summary suspension must be founded. G.S. 78A-39(c) requires the summary suspension order to include the reasons for its entry.

(7) Question If the Securities Division is determined not to be an "occupational licensing agency" within the meaning of G.S. 150-2(4b), do the provisions of Article 3 of the APA (procedure for administrative hearings) modify, restrict, or take precedence over the following actions permitted to the Administrator by the Securities Act:

(a)

the power to, by order, deny or revoke certain exemptions from the requirement of registration of securities, with respect to a particular transaction (G.S. 78A-18);

(b)

the power to issue a stop order denying effectiveness to, or suspending or revoking the effectiveness of any securities registration statement (G.S. 78A-29(a));

(c)

The power to hold a hearing for the purpose of making a determination of the fairness of the terms and conditions of a proposed securities transaction (G.S. 78A-30);

(d)

the power to, by order, deny, suspend, or revoke any registration of a securities dealer or salesman or to impose restrictions or limitations on such registrant (G.S. 78A-39(a));

(e)

the power to delegate authority to conduct hearings and to issue final agency orders and decision (G.S. 78A-45);

(f)

the power to conduct investigations and to require the giving of testimony and the production of evidence (G.S. 78A-46(b); and

(g)

the power to summarily issue cease and desist orders for the purpose of preventing violations of any provision of the Securities Act (G.S. 78A-47(b))?

Conclusion: Not applicable in view of the finding in (3).

(8) Question Do the provisions of the APA in any way modify, restrict, or supersede the provision of Chapter 1098 of the 1987 Session Laws ("An Act to Regulate Investment Advisors") with specific attention to the following provisions:

(a)

the Administrator’s power to deny, suspend, or revoke the registration of an investment advisor or an investment advisor representative (G.S. 78C-19);

(b)

the Administrator’s power to conduct investigations and to require the giving of testimony and production of evidence (G.S. 78C-27(b)); and

(c)

the administrator’s power to summarily issue cease and desist orders for the purpose of preventing violation of the Investment Advisors Act (G.S. 78C-28(b))?

Conclusion: Since the request was submitted, House Bill 1237 was enacted into law as Chapter 1098. The APA modifies the provision of Chapter 78C to the same extent it modified Chapter 78A.

(a)

Since G.S. 78C-19 has no specific provisions regarding notice and hearing, the APA will provide the procedures.

(b)

See reply to (4)(e) above.

(c)

See reply to (6) above.

Lacy H. Thornburg Attorney General

Daniel F. McLawhorn Special Deputy Attorney General