SEC Weighs Raising AUM Threshold for Advisor Registration

State-registered advisors pay higher licensing and registration fees in some states than do SEC-registered advisors, Amy Lynch, president and founder of FrontLine Compliance, told ThinkAdvisor Wednesday.

Also, "some states have net capital requirements" for advisors, meaning they must "maintain a certain amount of assets as net capital and provide financials to the state," Lynch said in an email.

In 2010, the Dodd-Frank Act required advisors with at least $100 million in assets under management to register with the SEC. The shift "removed about 2,100 firms from SEC oversight and assigned them to agencies in states where they did business," said Karen Barr, CEO of the Investment Adviser Association in Washington.

Since that time, Uyeda said Tuesday, the number of RIAs has grown about 45%, to 15,411.

Of these, 8,956 advisors had between $100 million and $1 billion in AUM, up from 5,853 in 2012, Uyeda continued.

In addition, there are 4,756 advisors with more than $1 billion in AUM, compared with 2,921 in 2012, he pointed out.

"In my view, it is time to re-examine the mid-size adviser regulatory split and consider whether it should be adjusted," Uyeda said, according to a transcript of his remarks. "Doing so could help to ensure Congress’s intent that the SEC focus on the larger, more complex investment advisers while the states concentrate their resources on the smaller firms."

Uyeda said he's asked SEC staff to conduct "a periodic evaluation on whether the current split between the SEC and the states remains optimal" and encouraged state regulators at the meeting to engage with the Division of Investment Management staff on the subject.

A 'Yearly Challenge'

Overseeing the growing number of advisors has been an ongoing issue for the agency.

Commissioner Hester Peirce, a Republican, said in 2023 that "determining how best to deploy the Division of Examination's never-enough resources is a yearly challenge." The SEC's exam staff, she said, "is the face of the commission, and we need to figure out how best to support them in their work."

Given the recent SEC staffing changes, "allocation of resources and the SEC's staffing footprint will undoubtedly be a key focus under Uyeda," as well as under potential incoming SEC Chairman Paul Atkins, according to Jamie Peterson, managing director of Iron Road Partners, a risk management consultancy.

"Given inflation, the increasing number of registered investment advisors, and the perceived lower risk associated with the smaller adviser population, it is logical for the SEC to consider raising the asset threshold for registration," Peterson told ThinkAdvisor Wednesday in an email.

"This adjustment would be a sensible lever for the SEC to utilize, aligning with their goals of lowering regulatory barriers to entry while also maintaining oversight over their higher-risk registrant population," he added.

Such a change, however, "could exert additional pressure on state regulators, especially in states with larger clusters of investment advisers and already strained budgets," Peterson added. "Many state regulators currently struggle to examine their existing registrant base, and a change of this nature would only exacerbate this challenge."

Lynch of FrontLine added that "the SEC, like many other government agencies, now must do its job with reduced staff and resources. These comments from Acting Chair Uyeda could stem from the fact that the SEC is now stressed beyond its means."

The SEC, Lynch continued, "could be looking to offload advisers onto the states and move certain rules off the federal SEC level and onto the state level simply to offset the reduced capabilities of the SEC."

As for reevaluating the mid-level advisors, "this is certainly one way for the SEC to lighten its examination burden and increase its abilities to examine more registrants each year," Lynch added.

"Most registered advisers are the smaller entities; raising the AUM requirements for SEC advisers is one way of removing thousands of advisers from its purview. However, the states are in no condition to take on a higher number of advisers," she said.

Barr cautioned that the SEC "should study all aspects of the issue prior to taking any action," and "work with state regulators and NASAA to assess the states’ capability and willingness to oversee another influx of advisers."