“Why Don’t We Just Cut Them a Break?” | Focus on Smaller Advisers

By Theresa Hamacher

April 6, 2023

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“One thing that frustrates me to no end is the lack of accommodation for smaller firms,” noted SEC Commissioner Mark T. Uyeda, adding that many at the SEC “don’t have a good grasp of what it means to be a smaller firm.”

Uyeda was speaking in conversation with Karen Barr, president and CEO of the Investment Adviser Association, at the 2023 IAA Investment Adviser Compliance Conference, held in Washington, D.C., in March.

The challenges facing smaller advisers – particularly from the cumulative burden of regulation – was a theme throughout the conference.

The investment adviser industry is a “community of smaller businesses,” stressed Barr. “88% of them have fewer than 50 employees.” According to the Investment Adviser Industry Snapshot 2022, at the median, advisers have a single office, mostly individual clients, eight employees and $412 million under management.

The problem begins with an “outdated” definition of small adviser, argued Uyeda. He explained that the Regulatory Flexibility Act requires that small advisers have at most $25 million in assets under management, but, under Dodd-Frank requirements, advisers generally can’t even register with the SEC unless they have at least $100 million in AUM.

As a result of the definitional issue, there’s a “steady pattern” of the SEC saying “there is no small business impact here,” he said.

Uyeda cited the specific example of say-on-pay proxy voting disclosure, which applies to advisers with at least $100 million in assets.

But he questioned whether the rule should apply to advisers that are only modestly larger than the $100 threshold. He pointed out that, while a large number of advisers have assets above that threshold but under $5 billion, their combined assets are quite small. At the same time, in his view, there was little public interest in say-on-pay votes by this cohort, while advisers could provide it to interested clients on request.

“Why make them go through this whole compliance exercise?” asked Uyeda. “Why don’t we just cut them a break?”

“In my mind, we need to be thinking about appropriately tailoring and scaling rules” through exemptions or scaled implementation, he explained. “Let’s face it, if you are a larger investment adviser, . . . it’s still going to be expensive. . . but it’s a lot more easily absorbable.”

Uyeda also expressed concern about the large number of rules that may be coming into effect within a short period, which will create implementation challenges for all advisers. “It’s bad enough that we’re having this whole slew of proposals,” he said. “We can’t have these hit all at the same time.”

Unfortunately, Uyeda explained that his focus on the burdens facing smaller advisers is receiving “pushback” from Chair Gensler and the two democratic Commissioners.

Speaking later in the conference, William Birdthistle, director of the SEC’s Division of Investment Management, also expressed support for accommodations for smaller advisers. Birdthistle spoke in conversation with Gail Bernstein, the IAA’s General Counsel.

“One thing that we’ve done certainly in our more recent releases is to put in . . . specific questions on. . . what the pain points are . . . to smaller advisers,” Birdthistle noted.

“I’m personally extremely receptive to ideas like staggering compliance dates, looking for areas where burdens might be lower,” he added. “It doesn’t have to be one size fits all; we’re open to modulating. . . I think we get it.”

“We have some dials we can turn there,” he added, though he cautioned “setting all the dials to zero is not really an option.”

Focusing on the outsourcing proposal, Bernstein noted that it can be particularly difficult for smaller advisers to negotiate contracts with the – generally much larger – third parties that advisers use to perform certain functions.

While Birdthistle explained that while he, personally, was open to some “modulation” to reflect the needs of smaller advisers, he stressed that the functions being outsourced “still remain very important.”

As a result, he explained, “I don’t want either or both parties pointing at the other and saying ‘not our problem’. . . We’re looking to make sure that things don’t fall between the stools.”

In addition, Birdthistle warned that burdens on smaller advisers would not prevent projects from moving forward. “We have, in many cases, a pretty clear idea of what our objectives are and what our regulatory concerns are,” he said. Comments along the lines of “this is a disaster” are “not as helpful,” he explained. “We are still going to produce the project.”

Perhaps the areas where adviser size is least relevant are examinations and enforcement, suggested Natasha Vij Greiner, the deputy director and national associate director of the Investment Adviser/Investment Company Examination Program of the SEC Division of Examinations, and Corey Schuster, co-chief of the Asset Management Unit of the SEC Division of Enforcement. Greiner and Schuster spoke at a separate session in conversation with Bernstein.

“I don’t think the expectation based on the size of the adviser changes,” said Greiner, though she noted, “We are cognizant that large firms have an army of internal staff and outside counsel that are helping them do their jobs.”

“We expect advisory firms to tailor their policies and procedures,” explained Schuster, but “advisers regardless of size have to comply with the law.”