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Regulatory Impacts on Small Business

The Vast Majority of Investment Advisers Are Small Businesses

Small businesses are the backbone of the fiduciary investment advisory community – with 58 percent of SEC-registered investment advisory firms having 10 or fewer non-clerical employees, and 88 percent having 50 or fewer non-clerical employees. The median number of employees of all federally registered advisers is eight.

By any logical measure, the vast majority of investment advisers are small businesses and should be treated accordingly. Policymakers should understand the unique challenges of smaller advisory firms and the cumulative impact of policy decisions on their businesses and their ability to serve the investing public.

Small advisers have been significantly affected by “one-size-fits-all” regulations – and SEC Division of Examination expectations – that effectively require fixed investments in infrastructure, technology, and systems relating to documentation, monitoring, operations, custody, business continuity planning, cybersecurity, and more. Moreover, the SEC is not, as a practical matter, required to analyze the economic impact of its regulations on small businesses, because virtually no SEC-registered advisers fall under the SEC’s definition of small business for purposes of the Regulatory Flexibility Act. Inexplicably, the SEC definition includes only advisory firms with less than $25 million in assets under management (AUM) – when, with rare exceptions, an advisory firm must have a minimum of $100 million AUM to fall under SEC jurisdiction.

The IAA encourages the SEC to conduct an assessment of the cumulative impact of policy and regulatory decisions on small businesses and their ability to serve the investing public. Other independent federal agencies have differing compliance requirements for small businesses, involving partial exceptions, a choice of alternative methods for compliance, extended compliance timetables, and tiered requirements.

We support SEC consideration of similarly tailored approaches to regulation and examination of smaller advisers, including by:

  • Amending its definition of small business (and small organization) to use a more meaningful metric beyond merely AUM, as well as increase the AUM threshold. For example, the number of employees would be a useful measure given that the data is readily available in Form ADV and often used in other contexts to define the relative size of companies.
  • Using the ever-increasing data at its disposal to evaluate the impact, including the cumulative impact, of regulations on small advisers.

Better targeting its rules to balance the burdens of regulation on these small businesses with the objectives of the regulations.

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