Understanding the SEC's Proposed Changes to Small Adviser Definitions and Their Impact on the Industry
- Ivan Barretto
- 3 days ago
- 4 min read
Understanding the SEC's Proposed Changes to Small Adviser Definitions and Their Impact on the Industry
The Securities and Exchange Commission (SEC) recently proposed updates to the way it defines “small advisers” under the Regulatory Flexibility Act (RFA). While these changes may seem technical, they carry significant implications for investment advisers, especially smaller firms. This post breaks down the SEC’s proposal, explains why it matters, and explores how it could affect the investment advisory industry in the years ahead.
What the SEC Is Proposing
The SEC’s new proposal aims to modernize the asset-based thresholds used to classify investment advisers as “small entities” under the RFA. These thresholds have remained unchanged for years, failing to reflect inflation and growth in the advisory industry. The key points of the proposal include:
Updating Assets Under Management (AUM) thresholds that define what qualifies as a “small” investment adviser
Introducing a system for future inflation-based adjustments to keep thresholds current without frequent rule changes
Making conforming amendments to Form ADV, the primary registration form for investment advisers
Updating rules related to electronic filing hardship exemptions for advisers who face difficulties with electronic submissions
The SEC has opened a 60-day public comment period following the proposal’s publication in the Federal Register. This allows advisers and other stakeholders to provide feedback before any final rule is adopted.
Why the Regulatory Flexibility Act Matters for Advisers
The Regulatory Flexibility Act requires federal agencies like the SEC to analyze how new regulations affect small entities. This analysis helps ensure that smaller firms are not burdened unnecessarily by rules designed for larger organizations. How an adviser is classified under the RFA influences several important factors:
Cost-benefit analysis in future SEC rulemakings
Consideration of alternatives or exemptions specifically for smaller firms
Overall regulatory burden imposed on small advisers
By updating the definitions of “small” advisers, the SEC aims to better align regulatory reviews with the current market realities. This means that smaller firms could see more tailored regulatory treatment, potentially reducing compliance costs and complexity.
How the Updated AUM Thresholds Work
Currently, the SEC defines “small” investment advisers based on fixed AUM thresholds that have not changed for many years. The proposal suggests raising these thresholds to reflect inflation and industry growth. For example, if the current threshold is $25 million in AUM, the new threshold might increase to a higher figure that better matches today’s market conditions.
The SEC also plans to introduce a mechanism for automatic inflation adjustments. This means the thresholds would be updated regularly based on a recognized inflation index, such as the Consumer Price Index (CPI). This approach prevents the thresholds from becoming outdated again and reduces the need for frequent rulemaking.
Impact on Form ADV and Filing Exemptions
Form ADV is the key document investment advisers use to register with the SEC and disclose important information. The proposal includes updates to Form ADV to reflect the new small entity definitions. This ensures consistency between the classification of advisers and the information they report.
Additionally, the SEC is updating rules related to electronic filing hardship exemptions. Some smaller advisers face challenges submitting filings electronically due to technical or resource limitations. The proposal clarifies and updates the criteria for granting exemptions, making it easier for eligible advisers to request relief.
What This Means for Small Investment Advisers
For smaller investment advisers, these proposed changes could bring several benefits:
More accurate classification: The updated thresholds will better reflect the size and scale of today’s advisory firms. This means advisers who have grown over time but still operate on a smaller scale won’t be unfairly classified as large entities.
Potential for reduced regulatory burden: Being classified as a small entity under the RFA can lead to exemptions or less stringent requirements in future SEC rules. This could lower compliance costs and administrative work.
Greater predictability: The inflation adjustment mechanism provides advisers with clearer expectations about how the SEC will classify them over time. This helps with long-term planning and resource allocation.
Improved access to filing exemptions: Clarified rules on electronic filing hardship exemptions may ease compliance challenges for advisers with limited technical resources.
Examples of How the Proposal Could Play Out
Imagine a small advisory firm managing $30 million in assets today. Under the current SEC thresholds, this firm might not qualify as a small entity, facing the full weight of regulatory requirements. With the updated thresholds, the firm could fall under the “small” category, gaining access to regulatory relief designed for smaller advisers.
Another example involves a startup advisory firm struggling with electronic filing due to limited staff and technology. The clarified hardship exemption rules could allow this firm to request relief from electronic filing requirements, reducing compliance hurdles during its early growth phase.
What Investment Advisers Should Do Next
Advisers should closely monitor the SEC’s rulemaking process and consider submitting comments during the public comment period. Providing feedback can help shape the final rule and ensure it reflects the realities of the advisory industry.
Additionally, advisers should:
Review their current AUM and classification status under the existing SEC definitions
Prepare for potential changes in reporting requirements on Form ADV
Assess their electronic filing capabilities and consider whether hardship exemptions might apply
Staying informed and proactive will help advisers navigate the evolving regulatory landscape smoothly.
The SEC’s proposal to update the definition of small investment advisers marks an important step toward more balanced regulation. By adjusting thresholds for inflation and industry growth, the SEC aims to create a fairer system that recognizes the diversity of advisory firms. Small advisers stand to benefit from reduced burdens and clearer rules, supporting their ability to serve clients effectively.
