SEC regulations give ‘short shrift’ to potential cost for small advisors

Investment Adviser Association files petition pushing agency to make number of staff, not AUM, the deciding factor in defining a firm as 'small.'

An organization representing investment advisors is pushing the SEC to calibrate its regulations so that they don’t pose an outsize burden for small advisors.

The Investment Adviser Association has filed a petition with the SEC asking it to amend its definition of a small advisor. Currently, the SEC deems an advisory firm as “small” if it has less than $25 million in assets under management.

But the threshold for advisors to register with the SEC is $100 million AUM. Advisors with less than $100 million AUM register with their states. The IAA maintains that the SEC’s definition of a small advisor prevents it from fulfilling its obligations under the Regulatory Flexibility Act to assess the economic impact of its rules on small advisors and consider alternatives that may be less costly for them.

The IAA’s petition asks the SEC to amend its rules to make the size of an advisory firm’s staff the determining factor in judging its size. The IAA wants the SEC to define a small advisor as one with 100 or fewer employees.

The IAA said the vast majority of investment advisory firms are small businesses, with 92% of them having fewer than 100 employees. Even if they manage hundreds of millions or more than $1 billion in assets, they may not have the staff to write policies and procedures for SEC rules, test and monitor compliance.

“There are so many rules and so many regulations, you need infrastructure and human personnel to put them into practice,” said Gail Bernstein, IAA general counsel.

The IAA said it shares the SEC’s goal of protecting investors and ensuring marketing integrity. But regulations “must be appropriately tailored to balance their burdens and benefits” and take into account the size and resources of the regulated firms, IAA CEO Karen Barr wrote in the Sept. 14 petition.

“A more realistic measure of what constitutes a smaller adviser would, in our view, help the Commission develop more effective regulations,” Barr wrote.

The SEC is currently pursuing a long roster of rules that apply to advisors, including cybersecurity, custody, outsourcing and the use of artificial intelligence. Bernstein said the agency gives “short shrift” to the potential costs for small advisors.

“There is no real analysis of what it would take for small advisors to implement [the rules],” Bernstein said. “We feel we have to push the commission to a more thorough, analytical assessment of the enormous impact on small advisors.”

The IAA also is backing legislation approved by the House that would require the SEC to redefine small advisors. Its prospects in the Senate are unclear.

The SEC doesn’t usually take up rules advocated in a petition. The Financial Services Institute filed a rulemaking petition in 2020 that would compel the SEC to address what FSI calls “regulation by enforcement.” The petition remains dormant at the agency.

Bernstein said the SEC has responded favorably to requests that it stagger rule implementation deadlines to give small advisors more time to comply. That may bode well for the effort to redefine “small.”

“We’re pretty encouraged that the time is now for this rulemaking petition,” she said.