SEC proposal on ‘small’ RIAs draws support from planning groups

A coalition of financial planning organizations including CFP Board are backing the Securities and Exchange Commission’s bid to modernize how it defines “small” advisory firms – but they want the agency to rethink how far it goes and how it gets there.

In a joint comment letter filed March 13, CFP Board, the Financial Planning Association, the National Association of Personal Financial Advisors, and XY Planning Network told the SEC that its current threshold for small entities under the Regulatory Flexibility Act – a ceiling of $25 million in regulatory assets under management, which is applied alongside a related test on total assets – is badly out of date.

That definition, set in the 1990s, has not kept up with the growth of the RIA industry. According to the groups, only about 3% of SEC-registered advisers counted as small entities in 2025, undermining the point of an analysis that is supposed to show how new rules hit smaller players.

In its own letter supporting the proposal, the Investment Adviser Association pointed to inflation, market performance, and consolidation trends that have led to higher asset levels across the board.

Under an amendment the SEC floated in January, the bar for small advisory firms under the Regulatory Flexibility Act would rise to $1 billion in assets under management. For investment companies, the cap would rise to $10 billion.

SEC Commissioner Hester Peirce framed the change as a long-overdue reality check. “The definition is so out of date,” Peirce told InvestmentNews at the Exchange ETF conference in Las Vegas, adding that she has “wanted [the commission] to look at this issue for a long time.” She said the shift, if adopted, “will help us to think about firms more realistically.”

The planning groups agree that the existing standard is obsolete, but they argue that assets alone are the wrong way to size up a firm’s capacity to absorb new compliance costs. In the letter, they warn that a $1 billion cutoff “may not adequately recognize that a small business’s constraints in complying with regulation are typically a function of the number of employees,” not just how much money it manages.

They point out that different business models can support the same level of assets with very different headcounts – for example, a handful of staff serving institutional pension clients versus dozens of employees working with mass affluent households. In both cases the regulatry AUM might be $1 billion, but the ability to build out compliance systems looks very different.

Instead, the coalition urges the SEC to analyze alternatives built around employee count, using data advisers already report on their Form ADV. They suggest that treating firms with roughly 40 to 50 employees as “small” would be more consistent with other federal rules that try to calibrate requirements for smaller businesses, such as the Family and Medical Leave Act and Affordable Care Act thresholds.

If the SEC sticks with an asset-based standard, the groups want much more transparency on how it lands on $1 billion. The proposal describes the goal as separating firms that are “dominant” in their field from those that are not, but the letter says the agency has not explained what dominance means in this context or what empirical data backs the specific number.

"We suggest that the Commission provide further explanation or economic analysis to justify the proposed amendment," the groups said.