June 20, 2021

Volume XI, Number 171

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June 18, 2021

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California to Conduct Written Electronic Examination of State-Registered Investment Advisers

In April 208, California’s Department of Business Oversight (“DBO”) announced that, beginning in October, it will begin conducting an online questionnaire-based examination of certain investment advisers registered with the DBO. This digital examination will be in addition to the DBO’s onsite examination program. The DBO recently sent registered investment advisers a reminder of this pending initiative. It is unclear from the DBO’s communications whether this online examination will be required for every investment adviser on an annual basis or only after an investment adviser receives an examination request.

Investment advisers registered with the DBO should have already provided a designated business email address to IAAEQ@dbo.ca.gov, but it appears that DBO should already be in possession of contact information submitted on Form ADV through the Investment Adviser Registration Depository. We previously contacted the DBO to try and determine whether this email notice is required for investment advisers that maintain an accurate Form ADV.

The DBO’s Monthly Bulletin distributed on September 12, 2018 suggests that all California-registered investment advisers are required to complete the online examination, even if they have a principal place of business in another state. This requirement could potentially conflict with Section 222 of the Investment Advisers Act of 1940, which states that: “No state may enforce any law or regulation that would require an investment adviser to maintain any books or records in addition to those required under the laws of the State in which it maintains its principal office and place of business, if the investment adviser—(1) is registered or licensed as such in the state in which it maintains its principal office and place of business; and (2) is in compliance with the applicable books and records requirements of the state in which it maintains its principal office and place of business.” We have formally requested that the DBO’s new online questionnaire-based examination acknowledges the limitations imposed on it by Section 222. Specifically, the online examination should only request from investment advisers with a principal place of business somewhere other than California, and these investment advisers should only be required to produce, exact copies of information that they are required to maintain according to the laws and rules of the state where they maintain their principal place of business.

We have contacted the DBO in an attempt to gather more information to better position our state-registered investment advisers. Specifically, we have requested the following information:

  • Will all California-registered investment advisers be required to complete the questionnaire? Will the questionnaire be structured differently for investment advisers with a principal place of business somewhere other than California?

  • When will the first examination begin?

  • Will it be an annual requirement for all investment advisers or will it be sent to selective investment advisers?

  • How much time will an investment adviser have to complete the questionnaire?

Could DBO provide us with a sample of the examination?

COPYRIGHT © 2021, STARK & STARKNational Law Review, Volume VIII, Number 297
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About this Author

Max L. Schatzow, Stark Law, financial attorney
Associate

Max Schatzow is a member of Stark & Stark’s Investment Management & Securities Group in the Lawrenceville, New Jersey office. Max concentrates his practice on counseling financial service entities including investment advisers, broker-dealers, and private investment companies (e.g., hedge funds, private equity funds, real estate funds, and “fund of funds”) on registration, compliance, liability, and litigation issues.

Max’s practice also focuses on the formation of private investment funds (e.g...

609-219-7450
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