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House Bill Would Ease Regulatory Burden on Small Investment Advisers


Bipartisan legislation calling on the SEC to revise its definition of small businesses to help ensure that the commission more broadly considers the burden of its regulations on small investment advisers has been reintroduced in Congress.  

The Investment Adviser Regulatory Flexibility Improvement Act (H.R. 2436) was introduced May 1 by Reps. Michael San Nicolas (D-Guam) and Bill Huizenga (R-MI), who both serve on the House Committee on Financial Services, where the legislation was referred. 

In the last Congress, identical legislation introduced by Huizenga and Rep. Gwen Moore (D-WI) was approved by the House as part of the JOBS and Investor Confidence Act of 2018. Companion legislation was introduced in the Senate by Sen. Mike Rounds (R-SD), but that bill never made it out of the Senate.

Alternative Methods

Under the terms of the legislation, no later than one year after the date of enactment, the SEC would revise the definitions of a “small business” and “small organization” under the Investment Advisers Act and Regulatory Flexibility Act to provide alternative methods under which a business or organization may qualify under such section. 

In making those revisions, the SEC would be required to consider whether such alternative methods should include a threshold based on the number of nonclerical employees of the business or organization. “Revising these definitions and considering whether such definitions should include more meaningful metrics will result in a better understanding of regulatory costs on small advisers and should lead to more tailored regulations, reduced burdens and improve the relationship and the delivery of advice to investors,” according to the committee’s legislative history of the bill.  

SEC’s Threshold

SEC regulations currently define “small business” and “small organization” as investment advisers –

  • with less than $25 million in AUM; 
  • with less than $5 million in total assets at the end of the most recent fiscal year; and 
  • that do not control or are not under common control with another investment adviser with more than $25 million in AUM or an entity with over $5 million in total assets at the end of the most recent fiscal year.

Prior to enactment of the Dodd-Frank Act, mandatory SEC registration for investment advisers was set at AUM of at least $25 million, but that legislation increased this mandatory SEC registration threshold from $25 million in AUM to at least $100 million in AUM.

When the legislation was reported out of the House Committee on Financial Services last year, the committee emphasized that it is “aware of concerns” that the SEC’s attention to the economic impact of its regulations on small investment advisory firms is “both inadequate and while not intentional, the SEC’s staff may not consider the effect of its rule on small investment advisers.”

The committee noted that with the increased threshold for SEC registration at $100 million in AUM, virtually no SEC-registered investment advisers could be deemed to be “small” for cost/benefit analysis purposes – even though more than 6,000 registered advisory firms employ 10 or fewer non-clerical employees. 

Rep. Maxine Waters (D-CA), who is the current Chairwoman of the House Financial Services Committee and supported last year’s JOBS and Investor Confidence Act, recently announced that Rep. San Nicolas will serve as Vice Chair of the Committee during the current Congress. In addition, Rep. Huizenga currently serves as the ranking Republican on the Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets. So, given its sponsors, the legislation seems to have a good chance at moving through the House. In the Senate, however, its prospects are unclear.