Key 2018 State of California RIA Examination Statistics and Insights

On January 10, 2018, the state of California Department of Business Oversight (“DBO”) submitted its 2018 Report on the Broker-Dealer/Investment Adviser (“BDIA”) Program. Under the California Corporate Securities Law of 1968, the California BDIA Program oversees the licensing and registration of registered investment adviser (“RIA”) firms registered at the state jurisdiction level located in the state of California. This recent report contains a wealth of valuable data as it relates to the state of California RIA examination program. We’ve highlighted some of these key insights below for the state which features more registered investment adviser firms compared to any other state in the country.

How many state-registered RIA firms based in California are examined each year?

This first table outlines the historical number of firms registered at the state level in California along with the frequency of RIA audits conducted by fiscal year:

Sources: January 2018 Report to the California State Legislature Broker Dealer/Investment Adviser Program

The table above shows that the number of state-registered firms with the principal place of business in California continues to steadily increase. As a reminder, investment advisory firms with less than $100 million in regulatory assets under management (“AUM”) generally register with the relevant state(s). On the other hand, firms with $100 million or more in regulatory AUM general register at the federal level with the Securities and Exchange Commission (“SEC”). Thus, the RIA industry itself continues to grow as the number of small and large firms continues to increase. From the 2012-2013 to the 2016-2017 fiscal year, the total number of state-registered firms based in California increased by 3.6% and the total number of individual investment adviser representatives licensed in the state grew by 3.2%. Thus, at least in the state of California, there are no clear signs of industry consolidation based on recent historical data.

Also, as the table above depicts, the California DBO has significantly increased the total percentage of state-registered RIA firms audited on annual basis from 1.46% in the 2014-2015 fiscal year to 10.16% in the 2016-2017 fiscal year. The BDO notes that it has “sole regulatory authority and oversight over all state investment advisers and, therefore, places a high priority on them.” As part of a shift towards more focus on the oversight of RIA firms, the BDIA program “reallocated its resources in fiscal year 2016-2017 to increase the number of examinations of investment adviser firms.”

Past, Present, and Future of State of California RIA Examinations

In total, the BDIA program completed 407 examinations of broker-dealers, broker-dealer branch offices and investment advisers in the 2016-2017 fiscal year. Of the 407 audits conducted, 13 resulted in referrals to the DBO’s Enforcement Division for potential license revocations. The remaining audits generally resulted in the discovery of compliance program deficiencies for which the firms were required to take corrective action. According the most recent 2017 Investment Adviser Coordinated Examinations Report released by the North American Securities Administrators Association (“NASAA”), on average, each examination of a state-registered advisory firm results in the discovery of 6.57 compliance deficiencies. 

While a 10.6% examination rate for the 2016-2017 fiscal year is a significant increase compared to recent years, the state of California BDIA program is focused on achieving an exam cycle of auditing each firm once every four years which would equate to a 25% annual examination rate. In order to help achieve this goal, the BDIA program is considering a number of examination program changes which include:

• Introduction of desk examinations for lower-risk firms
• Annual examinations through exam questionnaires of firms with a principal place of business outside of California
• Restructured exam work modules to create a more streamlined examination process
• Checking regularly with the SEC to ensure efforts are not being duplicated

In May 2017, the BDIA begin introducing its new work modules and is expected to report on its progress in the January 2019 annual report. The changes being considered by the state of California also closely mirror recent advancements in the SEC examination program which has been able to increase its audit frequency rates with better use of data, a movement towards more limited scope exams, and reallocation of examination staff away from broker dealers. However, similar to the continued challenge faced by the SEC Office of Compliance and Inspections (“OCIE”), is that the volume of state-registered firms in California continues to increase on an annual basis. 

Be sure to check back soon as we continue to provide more relevant state and federal investment adviser examination statistics and insights.