In 2007, a California Court of Appeal held that corporate officers and directors may be subject to licensure as broker-dealers unless they receive a commission for the sale of securities.  People v. Cole, 156 Cal. App. 4th 452 (2007).  Although the court's holding should be viewed in the context of the unique facts of that case, it raised considerable concern.  See my article on the Cole decision - A Shot not Heard - The Court of Appeal Holds that an Issuer's Directors and Officers must be Licensed as Securities Broker-Dealers, Business Law News (Issue 3, 2008).

Commissioner DuFauchard issued Release 119-C to address these concerns "until the Department considers whether the adoption of more formal regulations, such as those that mirror the federal “safe harbor” regulations, in order to provide better guidance and clarity to businesses seeking to raise capital in California."   Well, that time has now come and the Commissioner has proposed a new rule that would in effect exclude from the definition of "broker-dealer" anyone who is not deemed to be a broker under Rule 3a4-1 under the Securities Exchange Act of 1934, 17 C.F.R. 240.3a4-1. 

There are a couple of wrinkles, however.  First, the Commissioner's proposed rule inexplicably excludes anyone who is an employee of the issuer.  Because officers are typically employees as well, this would vitiate the benefits of the rule for most officers.  The final rule should eliminate this exclusion.  Second, the rule contains a "bad-boy" provision.

The comment period expires on July 12, 2010.  The Notice of Proposed Rulemaking contains instructions on how to comment.  For those who aren't familiar with the California Administrative Procedure Act, comments are a very important part of the process and very easy to submit.  I hope that those who have an interest in the subject (and you should if you are representing issuers or their officers) will take the time to submit a comment in support of this proposed rule.