Analysis of the 2004-05 Budget Bill Legislative Analyst's Office February 2004

Department of Corporations (2180)

The Department of Corporations (DOC) is responsible for protecting the public from unfair business practices and fraudulent or improper sales of financial products and services. The department fulfills its responsibility through its investment and lender-fiduciary programs. The DOC is supported by license fees and regulatory assessments, which are deposited in the State Corporations Fund.

The budget proposes total expenditures of $29 million and 276 personnel-years (PYs) in 2004-05. This is $2.1 million, or 7.8 percent, more than estimated current-year expenditures and 32 additional PYs. The increase is due to budget proposals to implement state laws regarding financial privacy (discussed below) and payday lenders/check cashers.

State Law on Financial Privacy Faces Federal Preemption Issues

We withhold recommendation on a proposal for $1.9 million and 22 positions to implement Chapter 241, Statutes of 2003 (SB 1, Speier). There are still many unresolved issues regarding the interaction between Chapter 241 and federal law.

The budget proposes $1.9 million and 22 positions for the department to implement and enforce Chapter 241. Chapter 241 establishes particular restrictions on the ability of businesses involved in financial-related transactions to share customer information. Chapter 241 affects the sharing of information with both a business' financial affiliates and independent (nonaffiliated) companies.

Federal Law. Federal law also governs the sharing of information between financial-related businesses. It generally allows states to adopt stricter measures than its own regarding sharing information with nonaffiliated companies. On the other hand, federal law generally preempts stricter state provisions regarding sharing information with affiliated companies. The federal affiliate provisions were due to expire on January 1, 2004. With these expiring provisions on the horizon, Chapter 241 was adopted in August 2003 and took effect in January 2004. Before Chapter 241 became effective, however, federal legislation permanently extended the preemption regarding affiliates. Chapter 241 includes provisions that are stronger than those in federal law for both affiliates and nonaffiliates. As a result, there are many unresolved issues regarding the interaction between Chapter 241 and federal law.

Proposal Too Broad. The department's proposal is based on full implementation and enforcement of all aspects of Chapter 241. The proposal does not appear to consider the likelihood that some activities will be preempted by federal law. Chapter 241's provisions regarding information sharing among affiliates appear to face the strongest likelihood of preemption. As a result, we withhold recommendation on the proposal pending additional clarification on federal preemption issues.