The Securities and Exchange Commission’s proposal to update how it defines a “small” advisory firm has drawn strong support from the Investment Adviser Association which argues the move better reflects modern business realities and mounting regulatory costs.
In a comment letter, the IAA praised the SEC’s effort to raise the regulatory threshold that distinguishes smaller advisory firms, saying the change aligns with long-standing advocacy from the organization. The proposal would shift the dividing line to firms managing less than $1bn in assets under management, a significant increase from the current standard.
The IAA contends the revision is overdue given the dramatic growth in assets and the increased complexity of compliance obligations that advisors face today.
According to the association, the existing definition no longer captures the operational scale or resource constraints of many advisory businesses. Over time, inflation, market performance, and consolidation trends have contributed to higher asset levels across the industry — even among firms that still operate with relatively lean staffing and infrastructure.
“The SEC’s proposal is a significant win for smaller investment advisers and for sound regulatory policy,” said Gail Bernstein, General Counsel and Head of Public Policy at the IAA. “For years, we have urged the Commission to modernize the definition of a small adviser so that its rulemaking analyses better reflect the firms actually affected by SEC regulations. We are pleased to see the Commission take this important step.”
In its comment letter to the SEC, the IAA noted that raising the threshold would better reflect the “significant increase in regulatory requirements and compliance costs” advisory firms have experienced in recent years. The group also emphasized that many firms currently classified as mid-sized continue to face challenges comparable to smaller organizations when it comes to implementing new rules and maintaining robust compliance programs.
Firms falling below the new threshold may benefit from tailored regulatory treatment or scaled expectations tied to their size, potentially easing compliance burdens at a time when margins are under pressure.
The IAA response highlights how regulatory complexity has become a defining issue for advisory firms of all sizes.
New reporting mandates, cybersecurity expectations, and expanded oversight have driven up operational costs, often requiring firms to invest heavily in technology, legal expertise, and compliance staff.
By modernizing the definition of a small advisor, the IAA argues, regulators can more effectively calibrate rules to reflect firms’ capacity and risk profiles. The group maintains that a more accurate classification system would help ensure that regulatory objectives are met without imposing disproportionate costs on firms that lack the scale of the largest asset managers.
The IAA suggested a single change to the proposal — removing the additional balance sheet test that currently sits alongside the RAUM threshold when determining how many firms qualify as small advisors. The association argued that balance sheet assets are an unreliable gauge of an advisor’s true scale and do not necessarily reflect the complexity of its operations or the resources it can dedicate to regulatory compliance. If the SEC decides to keep this component, the IAA said the Commission should promptly adjust the existing $5m benchmark to account for inflation.
The SEC’s proposal also reflects broader policy discussions about how best to oversee a rapidly evolving advisory landscape.
As client demand grows and services become more sophisticated — including financial planning, tax strategy, and alternative investments — firms have expanded both their offerings and asset bases.
“The Regulatory Flexibility Act is not about weakening investor protections or giving small firms special treatment. It’s about ensuring regulators carefully analyze how their rules affect smaller entities and consider ways to minimize unnecessary burdens so those firms can compete on a level playing field,” Berstein added. “Getting the definition of a small adviser right is essential to ensuring thoughtful, data driven regulation. A modern definition will give the SEC a stronger analytical foundation for understanding how its rules affect smaller firms and for tailoring regulations appropriately.”
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