Report shows few advisers examined by California oversight office

Broker-dealers and state-registered investment advisers in California have little chance of being examined by the state's Department of Business Oversight, according to figures from its most recent report to the state legislature. The report, required by the state's Budget Act of 2014, noted that the DBO examined only 6.2% of investment adviser firms in 2015-16, although the number represented a nearly 330% increase in examinations from the prior year. In the last five years, the number of investment adviser firms subject to examination by the DBO has increased nearly 15% from 3,255 to 3,737. In the same five-year period, the number of broker-dealer firms in California declined approximately 9.5%, from 3,210 to 2,906. In 2015-16, the DBO examined only 23 of those broker-dealers, or 0.8% of the total. In its report, the DBO estimated it would require 256 more examiners to achieve a four-year examination cycle. It currently employs 47 examiners. Writing in The National Law Review, Keith Paul Bishop, a partner in the law firm of Allen Matkins Leck Gamble Mallory & Natsis, said 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?”