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Investment Adviser Association pushes SEC to calibrate regulations for small advisors

by Janessa Lee

Investment Advisor Association Petitions SEC to Ease Regulatory Burdens on Small Advisors

The Investment Adviser Association (IAA) has recently filed a petition with the U.S. Securities and Exchange Commission (SEC) requesting a revision to its regulations to alleviate the disproportionate burden placed on small advisors. Currently, the SEC defines a small advisory firm as one with less than $25 million in assets under management (AUM). However, advisors with less than $100 million AUM register with their respective states while those with more must register with the SEC.

The IAA argues that the SEC’s current definition of a small advisor prevents it from fulfilling its obligations under the Regulatory Flexibility Act. This act requires the SEC to assess the economic impact of its rules on small advisors and consider alternative measures that may be less costly for them. As a result, the IAA is urging the SEC to amend its rules and consider the size of an advisory firm’s staff as the determining factor in judging its size. According to the IAA, a small advisor should be defined as one with 100 or fewer employees.

The association emphasizes that the majority of investment advisory firms are small businesses, with 92% of them having fewer than 100 employees. Despite managing significant assets, these firms may lack the necessary personnel to comply with SEC rules. Gail Bernstein, IAA general counsel, highlights the need for infrastructure and human personnel to implement and monitor compliance with the numerous regulations in place.

While the IAA recognizes the SEC’s objective of protecting investors and ensuring marketing integrity, they believe regulations must be tailored to balance their burdens and benefits, taking into account the size and resources of regulated firms. Karen Barr, CEO of the IAA, argues that redefining the criteria for a small advisor would enable the SEC to develop more effective regulations.

The SEC is currently focused on implementing a range of rules applicable to advisors, including those pertaining to cybersecurity, custody, outsourcing, and the use of artificial intelligence (AI). However, the IAA contends that the potential costs for small advisors are given insufficient consideration by the agency. Bernstein states that there is often no comprehensive analysis of the requirements small advisors must meet to implement these rules. The IAA is, therefore, urging the SEC to conduct a more thorough assessment of the impact on small advisors.

In addition to their petition, the IAA is supporting legislation approved by the House that also seeks to redefine small advisors. However, the prospects of this legislation in the Senate remain uncertain.

While it is uncommon for the SEC to address rules advocated in a petition, there have been instances where the agency has considered requests from the IAA for extended implementation deadlines. This has given small advisors more time to comply with certain regulations. Bernstein is optimistic that this positive engagement with the SEC may bode well for their efforts to redefine the definition of a small advisor.

The IAA’s efforts to ease regulatory burdens on small advisors are part of a broader industry push to ensure that regulations are fair and proportionate. By acknowledging the unique challenges that small advisory firms face, it is hoped that the SEC can strike the right balance between investor protection and avoiding undue regulatory hurdles.

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