Legislation that could help ease the regulatory burden on small financial advisory practices is gaining ground.
The U.S. House of Representatives on Wednesday passed a bill that would reduce burdens on small practices and solo financial advisors by requiring federal watchdogs to do more to consider how they would be adversely hit by proposed regulations.
Lawmakers in the House voted 367 to 8 across party lines on Wednesday in favor of the
Under current rules, advisors overseeing less than $25 million in client assets aren't allowed to register with the Securities and Exchange Commission, whose mission is to regulate securities markets and advisors and ensure safe and orderly markets for investors. The requirement for registering with the watchdog doesn't kick in until a firm has at least $110 million under management.
Neil Simon, the vice president of the Investment Adviser Association, said the threshold needs revision because it determines when the SEC is required under the federal Regulatory Flexibility Act of 1980 to go the extra length of trying to forecast how its proposed regulations are likely to affect small advisory firms.
Read:
Simon noted that most advisors don't register with the SEC unless they have more than $100 million under management. That means the federal regulator almost never has to predict how a proposed new rule will affect small firms, he said.
"If this were enacted … and I'm hopeful it will be, the SEC is going to pay much greater attention to smaller advisors, particularly amid the current torrent of regulatory proposals," Simon said.
The SEC has the authority to change the definition of a small business entity on its own. But it has not made any revisions since 1998,
The IAA has been one of many industry groups that has been up in arms not only about individual recent SEC rules but also the
Groups like the IAA argue that small firms often bear a higher regulatory burden than their larger rivals. The smaller a firm is, they say, the less likely it is to have staff or a department dedicated strictly to compliance.
Speaking on the House floor before the legislation was passed, Rep. Ann Wagner, a Republican from Missouri and the chair of the Financial Services Subcommittee on Capital Markets, said, "Small entities simply can't afford the number of lawyers and regulatory experts that large multinational firms can comply with every regulation while still being able to afford the cost of doing business."
The SEC will sometimes try to lighten the regulatory burden of new rules by giving smaller firms more time to come into compliance. Proposed changes to the SEC's custody rule, which requires advisors to hold certain types of assets purchased on behalf of clients with third-party banks, broker-dealers or trust companies for safe keeping, would give firms with $1 billion or less in assets under management 18 months to come into compliance. Advisors with more would have only a year.
The Small Entity Update Act would give the SEC a year after its enactment to study possible revisions to the definition of a small entity and then report its findings to Congress. Among other things, the SEC would have to look at the ways U.S. capital markets have grown since the definition was last amended and try to come up with criteria to ensure a "meaningful" number of firms fall into the small entity category.
The SEC would then have to revise its definition of a small business entity in five years and then again every five years after that.
