Some 56.9% (7,387) of SEC registered investment advisors employ 10 or fewer non-clerical employees, and 87.5% (11,367) employ 50 or fewer individuals, according to April 2019 ADV data. The median number of non-clerical employees of all SEC-registered advisors is nine, Bernstein said.
“Because regulatory compliance depends on financial and human resources, using an AUM-based test risks [misses] the true burdens of regulation on advisers, most of which are quintessential small businesses,” Bernstein said.
Instead, IAA wants the SEC to use an RIA’s number of non-clerical employees as a measure of which advisors should be considered “small” for purposes of regulatory exemption.
This measure would more appropriately reflect the potential burdens on smaller advisors, using data that is readily available in Form ADV and often used in other contexts to define the relative size of companies, the trade group argued.
“These advisers have been significantly burdened by ‘one-size-fits-all’ regulations which effectively require substantial fixed investments in infrastructure, technology, personnel, and systems relating to documentation, monitoring, operations, compliance, custody, business continuity planning, cybersecurity, and more,” Bernstein said in his letter.
The SEC has used asset analysis to decrease regulatory burdens on smaller firms before and should do so with the pay-to-play rules, Bernstein said.
For example, he said, the SEC recently amended Form ADV Part 1 to increase the threshold for collecting certain data from $150 million in separately managed account assets to $500 million.
As it stands now, the pay-to-lay rule imposes a significant economic burden on advisers of all sizes, “due to its complexity and its significant penalties,” she argued.
The rule currently imposes a two-year compensation ban if an investment advisor or its “covered associates” make certain political contributions to an official of a government entity client.