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Investment Advisers And Broker-Dealers Face Scant Likelihood Of California Examinations

The California Department of Business Oversight recently issued a report on its Broker-Dealer/Investment Adviser Program. This report was required by the Budget Act of 2014. Although short, the report provides some interesting data about California’s oversight of investment advisers and broker-dealers.

  • In the last five years, the number of investment adviser firms subject to examination by the BDO has increased nearly 15% from 3,255 to 3,737.  In 1996, regulation of investment advisers was divided between the states and the Securities and Exchange Commission pursuant to the National Securities Markets Improvement Act based on the amount of assets under management. As a result, states license and examine smaller investment advisers while the SEC licenses and examines larger investment advisers.  In 2010, Congress adjusted the registration thresholds pursuant to the Dodd Frank Wall Street Reform and Consumer Protection Act.

  • In the same five year period, the number of broker dealer firms has declined approximately 9.5% from 3,210 to 2,906.  Unlike investment advisers, broker-dealers must in nearly all cases register with both the states and the SEC.

  • The DBO examined only 6.21% of investment adviser firms in 2015-2016.  If this seems like a very small percentage, it actually represents a nearly 330% increase in examinations from the prior year.

  • The DBO conducted even fewer examinations of broker-dealers.  In 2015-2016, the DBO examined only 23 of the 2,906 (0.8%) registered broker-dealers.

  • The DBO referred 10 of the 269 licensees examined (nearly 4%) to its Enforcement Division for license revocations.  At this rate, the DBO would have referred about 246 of its investment adviser and broker-dealer licensees to its Enforcement Division if the DBO had examined all 6,643 of its licensees.

  • Currently the DBO has 73 authorized positions.  Of these positions, 47 are allocated to examinations, 7 to licensing, and 19 to program support.  The DBO estimates that it would require a 545% increase in the number of examiners to achieve a four year examination cycle.  This represents an additional 256 positions.

The report raises some important questions.  Is a four-year examination cycle the most cost effective means of protecting investors?  Would a risk based or enforcement only approach be a better use of resources?  Should examinations be more narrowly focused?  Are there private sector assurance alternatives that would provide the same or better levels of investor protection at a lower cost?

© 2010-2017 Allen Matkins Leck Gamble Mallory & Natsis LLP

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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