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

Department of Financial Institutions (2150)

The Department of Financial Institutions (DFI) licenses and regulates several different types of entities to protect the funds entrusted by the public to these institutions. These entities include domestic banks, California branches of foreign banks, credit unions, issuers of money orders and travelers checks, and transmitters of money abroad. The DFI is supported by revenues from fees and assessments charged to regulated entities. Most of these fees are deposited in the Financial Institutions Fund and the Credit Union Fund.

The budget proposes $24 million in expenditures and 215 personnel-years (PYs) for 2004-05. This is $2.1 million, or 9.7 percent, more than estimated current-year expenditures and 17 additional PYs. The increase is due to budget proposals to implement a new state law regarding financial privacy (discussed below) and enhance the department's information technology recovery and security capabilities.

State Law on Financial Privacy Faces Federal Preemption Issues

We withhold recommendation on a proposal for $1.9 million and 17 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 17 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.