SEC proposal could ease 'one-size-fits-all' compliance burden on advisors

By broadening which advisory firms qualify as “small entities,” the SEC’s latest proposal could require the agency to consider compliance costs and capabilities across a much larger portion of the registered investment adviser industry than it does today.

Under a proposal released this week, the SEC would raise its threshold for RIAs to be treated as small entities under the Regulatory Flexibility Act (RFA) to $1 billion assets under management, a jump from its current $25 million threshold that was amended by the SEC in 1998.

Only 3% of SEC-registered RIAs qualify as small entities under its current threshold, but about 75% would qualify under the SEC’s proposed new definition. According to its latest rule proposal, the SEC estimated that 15,850 of the total 21,650 RIAs manage less than $1 billion in assets.

“The change may actually benefit smaller SEC-registered advisors. By expanding the pool of advisors treated as “small entities” for RFA purposes, the SEC would be required to consider the effects of new rules on a much larger share of the advisory industry during its rulemaking process,” said Max Schatzow, a partner with RIA Lawyers. 

The Investment Adviser Association, which has pushed for years to overhaul the SEC’s small-entity definition, called the SEC’s newest proposal “an important step towards recognizing that the investment adviser industry is largely made up of small businesses that face different resource constraints from larger firms,” adding that “regulation should more appropriately take these factors into consideration.” 

Schatzow noted that his law firm works with many advisors managing roughly $500 million to $1 billion in assets. “Their compliance programs—and the resources they can devote to legal and compliance—look nothing like those of the largest institutions. It would be nice if the SEC would scope its rules and examinations of these advisers so as not to disrupt their day-to-day operations,” said Schatzow.

The SEC is accepting public comment on the proposal for 60 days after its publication in the Federal Register. The agency also said it may consider using metrics other than assets under management to judge what classifies a firm to be “small,” such as number of employees or revenue figures. The "IAA deserves a lot of credit for informing the SEC" and advocating for proposed changes to its small entity standard, says Carlo di Florio, president of financial services consultancy ACA Group.

"The SEC has a policy interest in tailoring regulations to small firms based on economic impact analysis, so as to support economic growth and not to overly burden them,” added di Florio. “This amendment helps ensure small firms benefit from tailored regulations reflecting relevant economic impact analysis.”

State-registered advisor Steven Crane of Financial Legacy Builders in Ohio said the proposal highlights the operational reality for mid-sized firms. “Treating firms with a few hundred million in AUM as if they are large institutions ignores the reality of how these firms actually operate,” he said, while cautioning that the smallest of RIAs could struggle with being lumped together with firms approaching $1 billion in assets.

“If this change leads to more realistic assessments of compliance costs and fewer one-size-fits-all rules designed for mega-firms, that’s a positive step,” Crane told InvestmentNews. “The risk, however, is that 'small entity' becomes so broad that it loses meaning, and truly small firms still end up absorbing disproportionate regulatory burden."