The SEC would have to consider how its rules economically impact small advisors under legislation being considered by the U.S. Senate.
This Small Entity Update Act, which passed the House with strong bipartisan support last year and was introduced in the Senate by Sen. Katie Britt of Missouri this week, would require the SEC to consider the impact of its regulations on smaller advisors and other firms that it regulates and determine whether there are less burdensome means of achieving regulatory goals. The bill also would require the regulator to expand the number of firms it defines as small.
Economic impact, business disruption and costs are factors the SEC is already supposed to be considering in its rulemaking under the Regulatory Flexibility Act. But Rep. Ann Wagner, R-Mo., chairman of the House Subcommittee on Capital Markets, said the SEC needs a further push to calibrate its rules so they don’t overwhelm and harm small businesses.
“This will lead to a more targeted regulatory environment for small businesses,” Wagner said last year, when her subcommittee passed the House bill.
The agency would also be required to expand the number of entities covered by increasing the amount of assets managed by “small firms” to above the current $25 million AUM mark. The Investment Adviser Association, which represents fiduciary financial advisors, has argued for years that $25 million is too low considering the SEC registration threshold for firms is $100 million in assets. The bill would also require the agency to recalculate the AUM it uses to define “small firm” based on inflation every five years.
Under the bill, the SEC would also have to provide specific and detailed recommendations to Congress on how the SEC can revise the definition of small entity to align with its goals, including reducing unnecessary burdens on small firms.
The IAA, which has been lobbying for the legislation for the better part of a decade, said in a statement that it “applauds the introduction of the legislation."
The trade group sent a rulemaking petition to the SEC last fall asking the agency to classify smaller firms based on employee headcount instead of assets under management.
More than 90% of firms in the advisory industry employee 100 or fewer workers, but with the SEC’s definition based on AUM, any review on regulatory impact on smaller businesses would be “virtually meaningless,” as most small businesses under the SEC’s definition wouldn’t be subject to its rules, the association argued.
According to the IAA, a recent SEC estimate found that only 489 of the 15,402 SEC-registered advisors were considered “small entities” by the Regulatory Flexibility Act, which requires each agency to examine the issues and effects rules have on small business and consider alternatives.
IAA General Counsel Gail Bernstein said the SEC’s outdated “smaller advisor” definition has real-world consequences for firms. For instance, last year’s cybersecurity rule required all firms to submit reports to the SEC within 48 hours of a cyber “incident.”
Bernstein said firms often need to consult with outside counsel and make it past multiple layers of approvals before sending such a report. She asked the SEC to justify the cost-benefit tradeoff of a 48-hour turnaround time on small firms.
Executives from IAA-member firms from across the country will be on Capitol Hill on June 5 and 6 this year “to voice their support for this legislation,” the IAA said.