The Vast Majority of Investment Advisers Are Small Businesses
Small businesses form the foundation of the fiduciary investment adviser community, with 58% of SEC-registered investment advisers employing 10 or fewer non-clerical staff and 88% employing 50 or fewer. The median number of employees across all federally registered advisers is just eight.
Despite this, the SEC’s definition of a small business for purposes of conducting an impact analysis in its rulemaking includes only firms with less than $25 million in assets under management (AUM). This definition is outdated and misaligned with reality, as most SEC-registered investment advisers must have at least $100 million in AUM to fall under the SEC’s jurisdiction. As a result, virtually no SEC-registered investment advisers qualify as small businesses under this standard, excluding small firms from meaningful economic impact analyses.
Small investment advisers face unique challenges and significant burdens from “one-size-fits-all” regulations and SEC Division of Examinations expectations. These requirements often necessitate substantial investments in infrastructure, technology, and systems for documentation, monitoring, operations, custody, business continuity planning, cybersecurity, and more. These cumulative burdens disproportionately impact small investment advisers and hinder their ability to serve the investing public effectively.
The IAA urges Congress to require the SEC to adopt tailored regulatory approaches that recognize the challenges faced by small investment advisers. At the same time, we encourage the SEC to act on its own volition to address these critical issues. Specifically:
- Update its definition of small business: Use more meaningful metrics, such as the number of employees, rather than solely relying on AUM. Additionally, increase the AUM threshold to better reflect the realities of the industry.
- Evaluate the cumulative impact of regulations: Leverage its expanding data resources to assess how regulatory decisions collectively affect small investment advisers.
- Implement tailored compliance measures: Consider partial exemptions, alternative compliance methods, extended timelines, and tiered requirements, similar to approaches used by other federal agencies, to balance regulatory objectives with the operational realities of small businesses.
This approach would foster a regulatory environment that supports the ability of small investment advisers to continue to serve the investing public effectively.