September 14, 2023
Contact:
IAA VP of Communications & Marketing Janay Rickwalder.
Today, as part of the IAA’s ongoing advocacy on behalf of smaller advisers, the IAA submitted a rulemaking petition to the SEC to require the agency to adhere to its statutory obligations to accurately analyze the impact of its regulations on smaller advisers and consider less onerous alternatives.
The IAA has for a long time called on the SEC to take steps to tailor its rules to minimize impacts to smaller advisers, including frequent requests for the SEC to adopt a more realistic standard for small advisers for purposes of the Regulatory Flexibility Act (RFA). Unfortunately, the scale and speed of the SEC’s recent rulemaking activities have exacerbated our concerns regarding the consequences of the current definition used by the agency, and we are amplifying our efforts to highlight these concerns.
Specifically, we are petitioning the SEC to amend the “small business” definition it uses for purposes of the RFA. The RFA was enacted by Congress to address concerns that federal regulations often disproportionately affect small businesses due to their limited resources, thus hindering their growth and competitiveness in the marketplace. The RFA requires the SEC to, among other things, consider the impact of its rulemakings on the entities subject to its regulation that qualify as small businesses, analyze effective alternatives that minimize small entity impact, and make such analyses available for public comment.
Currently, the SEC inexplicably defines a small adviser, in part, to include any adviser that has less than $25 million in AUM. However, with few exceptions, advisers are not permitted to register with the SEC unless they have at least $100 million in AUM, thus making any analysis the SEC does regarding the impact on smaller advisers virtually meaningless and contrary to the legislative intent of the RFA.
The IAA believes that the number of employees – specifically 100 or fewer – of an adviser is a more meaningful and accurate measure for classifying advisers as a smaller adviser.
In our petition, we are recommending that the SEC amend the definition to use the number of employees as the appropriate size standard for purposes of determining the impact of its regulations on small advisers. This approach also has the additional benefit of being more “evergreen” compared to asset-based standards that are far more susceptible to fluctuation and will inevitably be distorted with the passage of time. Moreover, the data on the number of employees is readily available in Form ADV and often used in other contexts to define the relative size of companies.
The IAA has also been working through Congress to compel the SEC to address this issue. In particular, the IAA strongly supports the enactment of H.R. 2792, the “Small Entity Update Act,” passed by the House of Representatives on May 30, 2023, which would require the SEC to update its definition of small entity under the RFA to ensure it covers a meaningful number of businesses under its authority. The agency would thereafter be required to analyze the impact of all proposed regulations on these small businesses and consider alternative approaches that minimize the regulatory burden imposed on them.
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