Bill to ease regulatory burden on small advisors sails through committee

The SEC's current definition of small advisors is 'antiquated,' which means the agency's regulations are not properly calibrated for such firms, the Investment Adviser Association said.

Legislation that would ease the regulatory burden on small investment advisory firms recently sailed through a House committee, giving its supporters hope that it also will find momentum in the Senate.

The House Financial Services Committee approved the Small Entity Update Act last Wednesday as part of a package of 15 bills the panel advanced to the House floor for a vote by the full chamber. The legislation would direct the Securities and Exchange Commission to conduct a study and carry out a rulemaking on the definition of a “small entity.”

The bill is designed to force the SEC to calibrate its regulations so that compliance isn’t overly burdensome for small businesses. The agency is supposed to do that under the existing Regulatory Flexibility Act. But the legislation’s author, Rep. Ann Wagner, R-Mo., and chairman of the Financial Services subcommittee on capital markets, said the SEC needs a further push to scale regulations appropriately.

“This will lead to a more targeted regulatory environment for small businesses,” Wagner said during the panel’s markup last Wednesday.

Rep. Sean Casten, D-Ill., praised the legislation. “This is a good-government bill,” Casten said.

The Investment Adviser Association backs Wagner’s bill. The group argues that the SEC’s definition of a small advisory firm needs to be revised because the agency currently considers small advisors to be those with $25 million or less in assets under management despite the SEC registration threshold of $100 million in AUM.

“It desperately needs to be updated,” said Neil Simon, IAA vice president for government relations.

The group has been pushing for the legislation for several years. The strong backing the Wagner bill achieved across the aisle in the committee gives Simon hope for continued legislative momentum.

“Bills that gain strong bipartisan support have very good prospects not only for getting through the House but also being taken up in the Senate,” he said.

The Wagner bill doesn’t specifically mention small investment advisors, but Simon said it would apply to future regulations affecting them.

“We are confident that [the bill] includes investment advisors because the current definition of small entities that applies to small advisors is antiquated,” he said.

The IAA would like to see a definition of small advisor that’s based on number of employees or some other metric.

The SEC could change the definition on its own. Simon said the IAA has talked to SEC officials and received a “sympathetic” hearing about oversight of small advisors. But the agency has not yet changed its rubric. It would be required to do so under Wagner’s bill.