Financial Regulatory Agencies in California

California is a heavily regulated state. There are over 200 agencies regulating everything from job licensure requirements and clean air standards to recycling requirements and political practices. A significant amount of these agencies deal with financial transparency and fairness.  Such agencies are often responsible for upholding strict standards for financial professionals, investigating fraud and various types of white collar crime, and protecting consumers from financial professionals that breach their professional duties.

Key State Agencies

While many criminal investigations involve cooperation from multiple agencies, the agencies listed below take a proactive role in the investigation of fraud, embezzlement, and other financial crimes. They include:

• Department of Real Estate: The Department of Real Estate (DRE) is a regulatory body responsible for overseeing and regulating various aspects of the real estate industry within a specific jurisdiction. In California, the DRE is responsible for issuing licenses to real estate professionals, including real estate agents, brokers, etc. The department also investigates complaints against real estate professionals to ensure they are adhering to ethical and legal standards. The DRE develops and updates Real Estate rules aimed to ensure fair practices, transparency, and compliance with the law. With collected data related to real estate transactions, market trends, and property values in the state, the DRE assesses the health of the real estate market and identifies potential issues or risks.
• Bureau of Investigation: The Division of Law Enforcement’s Bureau of Investigation includes numerous teams and programs that investigate a wide range of crimes. In particular, the Bureau’s White Collar Investigation Teams are responsible for investigating securities and commodities fraud, financial institution fraud, bank fraud, and more.
• Fraud Division of the Department of Insurance: The Fraud Division’s stated mission is to “…prevent economic loss through the detection, investigation, and arrest of insurance fraud offenders.” Their programs investigate automobile insurance fraud, workers’ compensation fraud, property and life insurance fraud, and disability/healthcare fraud.
• Criminal Investigation Bureau: This agency is home to the Criminal Investigations Bureau, a specialized team that looks into those accused of tax evasion, fraudulent tax paperwork, and other state tax crimes. The agency also assists those who have been targeted by scammers attempting to take money by claiming to be the Franchise Tax Board.
• Investigations Department of the Employment Development Department: This agency investigates crime related to unemployment fraud and other crimes committed against employers by employees. During the pandemic, their duties expanded to target those who attempted to intercept or illegally secure funds intended for those affected by the pandemic.
• Department of Business Oversight: The job of the DBO is to protect consumers through the regulation of financial service providers and the products they sell. State-licensed banks, credit unions, money transmitters, and other financial institutions fall under the jurisdiction of the DBO. They also oversee service providers like securities brokers and dealers, investment advisers, and payday lenders.

Regulation of Fiduciaries: the DFPI

In addition to the agencies described in brief above, it’s important to spend some time looking at the Professional Fiduciaries Bureau and Department of Financial Protection and Innovation (DFPI). This agency is part of the California Department of Consumer Affairs, and it oversees anyone who has a fiduciary duty to their clients. A fiduciary duty is an individual’s legal obligation to do what is in a person’s best interest. When someone fails to uphold their fiduciary duty and causes a client financial loss, this can trigger an investigation.

A big part of the Professional Fiduciaries Bureau involves protecting those who are vulnerable to exploitation. Professional fiduciaries may manage the financial affairs of seniors, people with disabilities, and children. Those in these categories are especially vulnerable, and professional fiduciaries who violate their duty are often quite literally taking food out of their clients’ mouths.

The Department of Financial Protection and Innovation regulates many businesses that handle financial transactions. Financial professionals, services, and products all fall within their jurisdiction. They include:

• Investment Advisors
• Commercial banks
• Public banks
• Industrial banks
• Foreign banks
• Out-of-state banks
• Broker-dealers and investment advisers
• Payday lenders
• Mortgage lenders
• Debt collectors
• Money transmitters
• Securities
• Trust companies

This agency is generally responsible for holding investment advisers responsible when they violate their fiduciary duty. Any advisor registered with the U.S. Securities and Exchange Commission is a fiduciary and, as a result, must act in their client’s best financial interest.

When a fiduciary violates their duty and their client can prove that they suffered financial losses as a result, the advisor may face stiff legal consequences. There are numerous ways a fiduciary may act against their client’s best interest—they may refer them to investments or services for which the advisor receives a kickback, even though those services are not best for the client. They may invest a client’s money in funds that are likely to cause them to lose money. It’s also a breach of duty if an advisor recommends a risky investment without fully informing the client of the risks.

If a fiduciary is accused of violating their duty, it is crucial to take immediate action. Even if the claims are unfounded, they risk losing their reputation and career simply because of these accusations. Being proactive about your defense after an accusation is one of the safest ways to protect your career and your future.

Patrick Delahunty

Patrick Delahunty is a former federal prosecutor with deep experience in resolving disputes. He advises individuals and companies in complex criminal, regulatory, and commercial litigation.