Small Entity Definition for Investment Advisers

Summary

SIFMA provided comments to the SEC on its proposed amendments to the small entity definition for investment advisers for purposes of the Regulatory Flexibility Act.

Excerpt

The Securities Industry and Financial Markets Association ("SIFMA") ¹ appreciates the opportunity to comment on the SEC's proposed amendments to the small entity definition for investment advisers for purposes of the Regulatory Flexibility Act ("RFA"). ² The RFA requires federal agencies to minimize the economic impact of federal rulemaking on small entities. The stated purpose of the Proposal is to raise the small entity threshold for investment advisers in order to more accurately capture the number of advisers that should be deemed 'small' with the goal of minimizing the economic impact of SEC regulations on small entities. ³

SIFMA generally supports SEC efforts to update and modernize regulatory requirements and to appropriately manage the burden of new and existing regulations on our member firms, particularly smaller firms. Thus, SIFMA does not oppose the Proposal. As discussed below, we are, however, concerned about the prospective downstream affects of the Proposal and its potential role in accelerating the trending, explosive growth in the number of independent investment advisers - unaccompanied by adequate regulatory exam frequency or oversight.

The Proposal would raise the "small entity" definition from $25 million (adopted in 1998) to $1 billion in Regulatory Assets Under Management ("RAUM") to address the significant growth in RAUM over the past several decades. This proposed change is estimated to increase the percentage of advisers classified as small from 3% to 75%. That means that 15,850 of the total 21,650 investment advisers would be classified as small under the Proposal.

Under the RFA, the SEC would need to assess how new rules affect these newly classified small advisers and explore ways to tailor rules (e.g., phased compliance, different standards, etc.) to reduce regulatory burdens on these advisers. Even if not ostensibly intended to affect substantive compliance, the Proposal would likely result in greater regulatory leniency towards the newly classified small advisers.

Notably, regulatory arbitrage is a contributing factor driving the shift from broker-dealer to independent registered investment adviser (RIA) models, often motivated by escaping stricter FINRA oversight for the lower-exam frequency of the SEC and the "lighter touch" of
SEC regulation. The Proposal would likely accelerate that trend.