The Governor’s reorganization plan provides for the demotion of the Departments of Corporations and Financial Institutions to the status of divisions within a newly created Department of Business Oversight.  As I discussed in post, the plan is likely to spell the end of the dual charter banking system in California and result in a further constriction of vitally need business credit. The plan is opposed by a very thoughtful and experienced group of former California regulators, including:

• Two former Superintendents of Banks;
• A former Commissioner of Financial Institutions;
• A former Chief Deputy (and acting) Superintendent of Banks; and
• A former acting General Counsel to the Department of Financial Institutions.

I also oppose the plan and submitted this comment letter to the Little Hoover Commission.  Recently, I received a copy of this thoughtful letter from Willie R. Barnes, who served as Commissioner of Corporation.  My letter focused primarily on the negative impacts of the plan on the chartering and regulation of banks.  Former Commissioner Barnes’ letter focuses on the impact of the plan on the Department of Corporations.  Most significantly, he notes that the plan will repeal Corporations Code Section 25602 which provides the statutory authority for the Commissioner to employ legal counsel.

Given that there are so many lawyers employed by state agencies, it may come as a surprise that state law closely circumscribes the authority of those agencies to be represented by their staff lawyers in proceedings.   Thus, Government Code Section 11042 provides:

"No state agency, commissioner, or officer shall employ any legal counsel other than the Attorney General, or one of his assistants or deputies, in any matter in which the agency, commissioner, or officer is interested, or is a party as a result of office or official duties."

The exclusive authority of the Attorney General to represent state agencies and their officers is further explicated in Government Code Section 12511:

"The Attorney General has charge, as attorney, of all legal matters in which the State is interested, except the business of The Regents of the University of California and of such other boards or officers as are by law authorized to employ attorneys."

Former Commissioner Barnes notes that during his administration the Department of Corporations successfully sponsored legislation, AB 783, that amended Section 25602 to permit the employment of legal counsel to act as the Commissioner’s attorney in actions and proceedings.  Governor Jerry Brown actually signed this bill into law when he first served as Governor. 

In my view, the repeal of Section 25602 will be great news for securities fraudsters and very bad news for investors.  The legislature is now considering the plan and either house could veto the plan.  Government Code Section 12080.5.