Independent financial advisors could get some regulatory relief from the Securities and Exchange Commission (SEC) through legislation approved by the House of Representatives.
On May 30, the House passed by an overwhelming vote of 367–8 the Small Entity Update Act (H.R. 2792) requiring the SEC to address the impact of its regulations on small entities. The legislation is sponsored by Rep. Ann Wagner (R-MO), who is Chair of the House Financial Services Subcommittee on Capital Markets.
More specifically, the legislation directs the SEC to assess the regulatory costs of compliance for small and growing businesses by first conducting a study to ensure that regulations placed on these businesses are not overly burdensome.
As part of the study, H.R. 2792 directs the agency to review the amount by which financial markets in the U.S. have grown since the last time the Commission amended the definition of the term “small entity” and how it should define the term to ensure that a meaningful number of entities would fall under that definition.
This would be followed by a rulemaking consistent with the results of such study, including defining the term ‘‘small entity” under the Regulatory Flexibility Act (RFA). The bill also directs the SEC to study and adjust the definition of small entity every five years thereafter.
Regulatory Flexibility Act
Under current law, agencies subject to the RFA are required to determine whether their rules have a significant economic impact on small entities, including businesses, nonprofit organizations and governmental jurisdictions. If so, agencies must consider alternatives that minimize that impact.
According to the Investment Advisor Association, however, 91% of SEC-registered advisers have 100 or fewer non-clerical employees, so as a practical matter, the SEC is not required to analyze the economic impact of its regulations on small businesses under the RFA because “virtually no SEC-registered advisers fall under the definition of small business adopted by the SEC.”
“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 the SEC’s jurisdiction,” the IAA explains, adding that Congress gave the agency authority under the RFA to update this definition, but the agency “has failed to do so.”
According to the House Financial Services Committee’s report, the bill seeks to address longstanding concerns that numerous SEC rules are not tailored to appropriately balance the SEC’s mandates to protect investors and facilitate capital formation. “Studying and revising these definitions—and considering whether such definitions should include more meaningful metrics—will result in a better understanding of regulatory costs on small entities and will ensure that the SEC modernizes its criteria for defining ‘small entities,’” explains House Financial Services Committee Chair Rep. Patrick McHenry (R-NC).
“Small businesses, which make up 99% of all enterprises and employ almost half of the U.S. workforce, are disproportionately affected by overly burdensome regulatory barriers,” stated Rep. Wagner following passage of the bill. “Small entities simply can’t afford the number of lawyers and regulatory experts that large, multinational firms can to comply with every regulation while still being able to afford the cost of doing business.”
Wagner adds that her legislation will lead to a more targeted regulatory framework for these entities and reduce burdens on small entities under the nation’s securities laws.