SEC wants more ‘realistic’ view of small advisory firms by redefining them, says commissioner

SEC Commissioner Hester Peirce says that the regulator’s proposal of update its definition of a “small” advisory firm will give it a much more accurate view of a wide swath of the industry. The move could have major implications for the compliance burdens place on a slew of firms.

In a dramatic move earlier this year the SEC said that it would raise the limit for RIAs to be considered “small entities” under the Regulatory Flexibility Act from $25 million to $1 billion in assets under management. If the proposal is accepted, the cap would jump from $50 million to $10 billion in assets for investment companies.

The proposal is important for the RIA industry because the Act places a requirement on federal agencies to work out how new rules would place a compliance burden on smaller firms and consider alternatives. Expanding the definition of what constitutes a “small” advisory firm could therefore potentially reduce the compliance burden on a much larger number of RIA companies.

“The definition is so out of date,” Peirce told InvestmentNews at the Exchange ETF conference in Las Vegas. “I haven’t had a chance to read the comments that have come in yet, but I have wanted us to look at this issue for a long time.”

“It’s going to help us as a regulator, again, if it gets adopted, which is not final, it will help us to think about firms more realistically,” Peirce added.

Advisory firms are wrestling with a complex regulatory environment that encompasses new reporting mandates, cybersecurity requirements, and increased oversight.

In a statement announcing the proposed change, SEC Chair Paul Atkins said that the proposal is consistent with the Commission’s intent to modernize regulatory requirements. The proposal’s goal is to minimize the “significant economic impact” on small entities.

Last week the Investment Adviser Association described the SEC’s proposal as “an important step” toward more accurately capturing the structure and resource constraints of today’s adviser industry. The proposal also aligns closely with concerns the IAA raised in 2024 regarding the need for more accurate consideration of regulatory impacts on smaller advisers, the industry group said.

Charles Schwab also threw its weight behind the proposal in a letter to the SEC last week. However, the company also encouraged the Commission to provide adequate notice and a reasonable implementation period of 180 days. In particular, Charles Schwab noted that firms will have to update internal form ADV filing procedures, train their compliance and personnel, and coordinate updates with third-party compliance vendors or filing service providers.

Earlier Monday, during an on-stage discussion at Exchange, Peirce described her meetings with compliance officers in the industry and highlighted, in particular, their struggles with AI. “I often get an earful,” she said. “One of the questions I have gotten at those meetings is ‘we want to use AI, but we’re really concerned because we feel that if we do it we’re walking into some landmines on the regulatory side’,” she said. “So that’s something that we are thinking about.”

“My view is that we don’t need a rule that is specifically for AI unless we see problems that are specifically tied to AI,” Pierce added. “But maybe we need to think about modernizing our record-keeping rules in light of AI – modernizing record-keeping rules is something that, more broadly, needs to be done.”