The Securities and Exchange Commission released a plan late Wednesday to modernize its definition of a small business by increasing the AUM thresholds under which small investment advisors are deemed small entities.
The plan could ease compliance burdens for RIAs with less than $1 billion in assets under management.
The SEC is seeking to make changes regarding small entities for purposes of the Regulatory Flexibility Act, which requires federal agencies to analyze the economic impact of their rules.
The proposal would:
- increase the assets under management threshold below which an advisor is considered to be a "small entity" from $25 million to $1 billion and request comment on whether to amend the total asset threshold;
- provide for inflation adjustments to the asset thresholds every 10 years; and
- amend Form ADV in conformity with the threshold changes and make certain clarifying changes.
Amy Lynch, president and founder of FrontLine Compliance, said Thursday in an email that the AUM levels in the SEC's plan "are a huge bump up from the current levels and reflects the changes in the industry since the last update in 1998."
The investment advisor universe "has grown and the perceived definition of what constitutes a small RIA based upon assets has always been much higher than the SEC definition," Lynch added in the email. "The main benefit of these changes is that smaller entities, as defined by the SEC, typically have longer phase-in periods for any new rules. So, this will give many more entities more time to transition operations and compliance when a new rule is imposed."
Further, SEC Chairman Paul Atkins "has hinted that future rulemaking would be bifurcated between small and large firms so again, this could be make compliance much easier for many more firms that will now qualify as small entities," Lynch said.
The SEC "has a longstanding commitment to understanding and addressing the concerns of small entities," Atkins said in a statement. "Today's proposal — consistent with the SEC's intent to modernize regulatory requirements — would further this commitment by more accurately capturing the types and numbers of investment advisers and investment companies that are 'small.'
"This, in turn, would help the Commission more appropriately promote the effectiveness and efficiency of its regulations, with the goal of minimizing the significant economic impact on small entities," he added.
The Small Entity Update Act, H.R. 3382, which called on the SEC to modernize its definition of a small business, passed the House last June. Modernizing the definition was also among the major rules the SEC said it would tackle this year as part of its regulatory agenda.
The Investment Adviser Association said in previous comments to ThinkAdvisor that it "strongly supports" the Small Entity Update Act.
"Currently, the SEC's definition of a small adviser includes only those with less than $25 million in assets under management (AUM)," IAA said. "However, the threshold for SEC registration is $100 million AUM — with limited exceptions — effectively excluding small advisers from the protections and considerations intended by the Regulatory Flexibility Act."
On Thursday, IAA said that it has "long advocated that the SEC adopt a more realistic approach to how it evaluates the impacts of its rulemaking" on smaller advisors.
The SEC proposal "is 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 and that regulation should more appropriately take these factors into consideration," IAA said.
"We look forward to reviewing the proposal and engaging with the SEC to ensure that the final rule accurately reflects the makeup of the adviser industry," the group explained.
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