Chapter 3Examination

Section § 3301

Explanation

This law allows a department to inspect the business practices of licensees involved in digital financial assets to ensure compliance with the law. This can happen anytime, without prior notice, and applies to businesses both within and outside California.

The department can review all relevant records and the business must assist in the examination. Additionally, the business being inspected is responsible for covering the costs of these examinations, which are calculated based on the average hourly cost for examiners.

(a)Copy CA Financial Code § 3301(a)
(1)Copy CA Financial Code § 3301(a)(1) (A) The department may, at any time and from time to time, examine the business and any office, within or outside this state, of any licensee, or any agent of a licensee, in order to ascertain whether the business is being conducted in a lawful manner and whether all digital financial asset business activity is properly accounted for.
(B)CA Financial Code § 3301(a)(1)(B) The directors, officers, and employees of a licensee, or agent of a licensee, being examined by the department shall exhibit to the department, on request, any or all of the licensee’s accounts, books, correspondence, memoranda, papers, and other records and shall otherwise facilitate the examination so far as it may be in their power to do so.
(2)CA Financial Code § 3301(a)(2) The department may examine a licensee pursuant to this subdivision without prior notice to the licensee.
(b)CA Financial Code § 3301(b) A licensee shall pay the reasonable and necessary costs of an examination under this section to the commissioner and the commissioner may maintain an action for the recovery of the cost in any court of competent jurisdiction. In determining the cost of the examination, the commissioner may use the estimated average hourly cost for all persons performing examinations of licensees or other persons subject to this division for the fiscal year.
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(Added by Stats. 2023, Ch. 792, Sec. 1. (AB 39) Effective January 1, 2024.)

Section § 3303

Explanation

This California law requires businesses dealing in digital financial assets to keep detailed records of their transactions with residents for five years. These records must include information such as transaction details, resident identity, and amounts involved. Businesses need to keep an ongoing general ledger and statements, and they must also report any disputes with residents. Furthermore, if these records are kept outside the state, companies must provide access to them within three days upon request. The state's department can inspect these records to ensure compliance with laws.

(a)CA Financial Code § 3303(a) A licensee shall maintain, for all digital financial asset business activity with, or on behalf of, a resident for five years after the date of the activity, a record of all of the following:
(1)CA Financial Code § 3303(a)(1) Any transaction of the licensee with, or on behalf of, the resident or for the licensee’s account in this state, including all of the following:
(A)CA Financial Code § 3303(a)(1)(A) The identity of the resident.
(B)CA Financial Code § 3303(a)(1)(B) The form of the transaction.
(C)CA Financial Code § 3303(a)(1)(C) The amount, date, and payment instructions given by the resident.
(D)CA Financial Code § 3303(a)(1)(D) The account number, name, and United States Postal Service mailing address of the resident, and, to the extent feasible, other parties to the transaction.
(2)CA Financial Code § 3303(a)(2) The aggregate number of transactions and aggregate value of transactions by the licensee with, or on behalf of, the resident and for the licensee’s account in this state expressed in United States dollar equivalent of digital financial assets for the previous 12 calendar months.
(3)CA Financial Code § 3303(a)(3) Any transaction in which the licensee exchanged one form of digital financial asset for legal tender or another form of digital financial asset with, or on behalf of, the resident.
(4)CA Financial Code § 3303(a)(4) A general ledger maintained at least monthly that lists all assets, liabilities, capital, income, and expenses of the licensee.
(5)CA Financial Code § 3303(a)(5) Any business call report the licensee is required to create or provide to the department.
(6)CA Financial Code § 3303(a)(6) Bank statements and bank reconciliation records for the licensee and the name, account number, and United States Postal Service mailing address of any bank the licensee uses in the conduct of its digital financial asset business activity with, or on behalf of, the resident.
(7)CA Financial Code § 3303(a)(7) A report of any dispute with the resident.
(8)CA Financial Code § 3303(a)(8) If applicable, a report maintained at least monthly that demonstrates compliance with Section 3601.
(b)CA Financial Code § 3303(b) A licensee shall maintain records required by subdivision (a) in a form that enables the department to determine whether the licensee is in compliance with this division, any court order, and the laws of this state.
(c)CA Financial Code § 3303(c) If a licensee maintains records outside this state that pertain to transactions with, or on behalf of, a resident, the licensee shall make the records available to the department not later than three days after request, or, on a determination by the department, at a later time.
(d)CA Financial Code § 3303(d) All records maintained by a licensee are subject to inspection by the department.
digital financial assets transaction records resident transaction identity verification general ledger dispute report compliance demonstration bank statements aggregate transactions digital asset exchange court order compliance record inspection out-of-state records compliance with laws three-day record access
(Amended by Stats. 2024, Ch. 945, Sec. 2. (AB 1934) Effective January 1, 2025.)

Section § 3305

Explanation

This law allows the department to work together and share information with various organizations, including self-regulatory groups, government agencies, law enforcement, and international regulators, regarding the actions and behavior of a licensed individual or business in the state.

The department may cooperate, coordinate, jointly examine, consult, and share records and other information with a self-regulatory organization, a federal or state agency, law enforcement, or a regulator of a jurisdiction outside the United States, concerning the affairs and conduct of a licensee in this state.
information sharing self-regulatory organization joint examination consultation licensee conduct international cooperation federal agency state agency law enforcement regulator record sharing cross-jurisdictional collaboration licensee affairs coordination inter-agency cooperation
(Added by Stats. 2023, Ch. 792, Sec. 1. (AB 39) Effective January 1, 2024.)

Section § 3307

Explanation

If you have a license for digital financial activities in California, you must report certain changes to the department within 15 days. These changes include any significant updates to your license application or annual report, changes in the nature of your business that could affect its legality, safety, or soundness, and any changes in top management or people in control.

(a)CA Financial Code § 3307(a) A licensee shall file with the department a report of the following, as may be applicable:
(1)CA Financial Code § 3307(a)(1) A material change in information in the application for a license under this division or the most recent annual report of the licensee under this division.
(2)CA Financial Code § 3307(a)(2) A change in the licensee’s business for the conduct of its digital financial asset business activity with, or on behalf of, a resident that meets one of the following criteria:
(A)CA Financial Code § 3307(a)(2)(A) The change may raise a legal or regulatory issue about the permissibility of the licensee’s digital financial business activity.
(B)CA Financial Code § 3307(a)(2)(B) The proposed change may raise safety and soundness or operational concerns.
(C)CA Financial Code § 3307(a)(2)(C) The proposed change is to digital financial business activity that may cause such activity to be materially different from that previously listed on the application for licensing by the commissioner.
(3)CA Financial Code § 3307(a)(3) A change of an executive officer, responsible individual, or person in control of the licensee.
(b)CA Financial Code § 3307(b) A report required by this section shall be filed not later than 15 days after the change described in subdivision (a).
digital financial asset business licensee reporting requirements material change application update annual report change business conduct changes legal issue regulatory issue safety concerns operational concerns executive officer change person in control resident business activity 15-day reporting deadline California digital finance
(Added by Stats. 2023, Ch. 792, Sec. 1. (AB 39) Effective January 1, 2024.)

Section § 3309

Explanation

This section deals with the rules surrounding a change in control of a financial licensee. If a person is set to control more than 10% of a licensee's voting securities, they might exert control. Control is established if a person wields 25% or more of the voting power, or 10% in interconnected entities. Simply being an executive officer doesn't equal control.

Before a licensee's control can change, the person seeking control must submit an application and necessary information to the department. The department's commissioner will only approve if the person and their officers are of good character, financially stable, and competent in digital financial businesses while ensuring compliance with all regulations.

The proposed controller can't make detrimental changes to the business. If approved, the department notifies involved parties. If denied or terms aren't met within 31 days, the change is abandoned. Conflicts with other state agencies could also halt proposed changes unless resolved.

(a)CA Financial Code § 3309(a) For purposes of this section, “proposed person to be in control” means the person that would control a licensee after a proposed transaction that would result in a change in control of the licensee.
(b)CA Financial Code § 3309(b) The following rules apply in determining whether a person has control over a licensee:
(1)CA Financial Code § 3309(b)(1) There is a rebuttable presumption of control if a person directly or indirectly owns, controls, holds with the power to vote, or holds proxies representing, 10 percent or more of the then outstanding voting securities issued by the licensee.
(2)CA Financial Code § 3309(b)(2) A person has control over a licensee if the person’s voting power in the licensee constitutes or will constitute at least 25 percent of the total voting power of the licensee.
(3)CA Financial Code § 3309(b)(3) A person has control over a licensee if the person’s voting power in another person constitutes or will constitute at least 10 percent of the total voting power of the other person and the other person’s voting power in the licensee constitutes at least 10 percent of the total voting power of the licensee.
(4)CA Financial Code § 3309(b)(4) A person does not have control over a licensee solely because that person is an executive officer of the licensee.
(c)CA Financial Code § 3309(c) Before a proposed change in control of a licensee, the proposed person to be in control shall submit to the department in a record both of the following:
(1)CA Financial Code § 3309(c)(1) An application in a form and medium prescribed by the department.
(2)CA Financial Code § 3309(c)(2) The information and records that Section 3203 would require if the proposed person to be in control already had control of the licensee.
(d)CA Financial Code § 3309(d) The department shall not approve an application unless the commissioner finds all of the following:
(1)CA Financial Code § 3309(d)(1) The proposed person to be in control and all executive officers of the proposed person to be in control, if any, are of good character and sound financial standing.
(2)CA Financial Code § 3309(d)(2) The proposed person to be in control is competent to engage in the business of digital financial business activity.
(3)CA Financial Code § 3309(d)(3) It is reasonable to believe that, if the person acquires control of the licensee, the proposed person to be in control and the licensee will comply with all applicable provisions of this division and any regulation or order issued under this division.
(4)CA Financial Code § 3309(d)(4) The proposed person to be in control plans, if any, to make any major change in the business, corporate structure, or management of the licensee are not detrimental to the safety and soundness of the licensee.
(e)CA Financial Code § 3309(e) The department, in accordance with Section 3203, shall approve, approve with conditions, or deny an application for a change in control of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be in control if the department had approved the change in control. If the department denies the application, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with or on behalf of residents.
(f)CA Financial Code § 3309(f) If the department applies a condition to approval of a change in control of a licensee, and the department does not receive notice of the applicant’s acceptance of the condition specified by the department not later than 31 days after the department sends notice of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the proposed change in control or cease digital financial asset business activity with, or on behalf of, residents.
(g)CA Financial Code § 3309(g) The department may revoke or modify a determination under subdivision (d), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(h)CA Financial Code § 3309(h) If a change in control of a licensee requires approval of an agency of the state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed change in control cannot be completed because the conflict cannot be resolved, the licensee shall abandon the change in control or cease digital financial asset business activity with, or on behalf of, residents.
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(Added by Stats. 2023, Ch. 792, Sec. 1. (AB 39) Effective January 1, 2024.)

Section § 3311

Explanation

This law outlines the process and requirements for a digital financial business (licensee) in California to merge or consolidate with another company. Before merging, the licensee must submit an application, the merger plan, and information on the future surviving entity to the relevant department. If the merger affects control, additional rules apply. The department will only approve the merger if it won't lead to a monopoly or limit competition, and if the new company's leadership is considered competent and financially stable.

The department will approve, conditionally approve, or deny the merger based on these assessments and is responsible for notifying the involved parties. If there are conflicting approvals from different agencies, the merger could be halted.

(a)CA Financial Code § 3311(a) Before a proposed merger or consolidation of a licensee with another person, the licensee shall submit all of the following, as applicable, to the department in a record:
(1)CA Financial Code § 3311(a)(1) An application in a form and medium prescribed by the department.
(2)CA Financial Code § 3311(a)(2) The plan of merger or consolidation in accordance with subdivision (e).
(3)CA Financial Code § 3311(a)(3) In the case of a licensee, the information required by Section 3203 concerning the person that would be the surviving entity in the proposed merger or consolidation.
(b)CA Financial Code § 3311(b) If a proposed merger or consolidation would change the control of a licensee, the licensee shall comply with Section 3309 and this section.
(c)CA Financial Code § 3311(c) The department shall not approve the application for a merger or consolidation unless the commissioner finds all of the following:
(1)CA Financial Code § 3311(c)(1) That the merger or consolidation will not result in a monopoly and will not be in furtherance of any combination or conspiracy to monopolize or to attempt to monopolize digital financial business activity in this state.
(2)CA Financial Code § 3311(c)(2) That the merger or consolidation will not have the effect in any section of this state of substantially lessening competition, tending to create a monopoly, or otherwise being in restraint of trade, or that the anticompetitive effect is clearly outweighed in the public interest by the probable effect of the merger in meeting the convenience and needs of the community to be served.
(3)CA Financial Code § 3311(c)(3) That the financial condition of the surviving entity, including its capital and liquidity, will be satisfactorily based on the factors listed in subdivision (b) of Section 3207.
(4)CA Financial Code § 3311(c)(4) That the executive officers of the surviving entity are of good character and sound financial standing and are competent to engage in digital financial business activity.
(d)CA Financial Code § 3311(d) The department, in accordance with Section 3203, shall approve, conditionally approve, or deny an application for approval of a merger or consolidation of a licensee. The department, in a record, shall send notice of its decision to the licensee and the person that would be the surviving entity. If the department denies the application, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(e)CA Financial Code § 3311(e) The department may revoke or modify a determination under subdivision (c), after notice and opportunity to be heard, if, in its judgment, revocation or modification is consistent with this division.
(f)CA Financial Code § 3311(f) A plan of merger or consolidation of a licensee with another person shall do all of the following:
(1)CA Financial Code § 3311(f)(1) Describe the effect of the proposed transaction on the licensee’s conduct of digital financial asset business activity with, or on behalf of, residents.
(2)CA Financial Code § 3311(f)(2) Identify each person to be merged or consolidated and the person that would be the surviving entity.
(3)CA Financial Code § 3311(f)(3) Describe the terms and conditions of the merger or consolidation and the mode of carrying it into effect.
(g)CA Financial Code § 3311(g) If a merger or consolidation of a licensee and another person requires approval of an agency of this state, and the action of the other agency conflicts with that of the department, the department shall confer with the other agency. If the proposed merger or consolidation cannot be completed because the conflict cannot be resolved, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(h)CA Financial Code § 3311(h) The department may condition approval of an application under subdivision (a). If the department does not receive notice from the parties that the parties accept the department’s condition not later than 31 days after the department sends notice in a record of the condition, the application is deemed denied. If the application is deemed denied, the licensee shall abandon the merger or consolidation or cease digital financial asset business activity with, or on behalf of, residents.
(i)CA Financial Code § 3311(i) If a licensee acquires substantially all of the assets of a person, whether or not the person’s license was approved by the department, the transaction is subject to this section.
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(Added by Stats. 2023, Ch. 792, Sec. 1. (AB 39) Effective January 1, 2024.)