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News July 30, 2018 Issue

Bill Requiring SEC to Redefine Small Business Moves Forward in Congress

Small business needs may soon play a greater part in SEC deliberations. The House of Representatives on July 17 with an overwhelming bipartisan vote passed a bill that would require the SEC to redefine the definitions of "small business" and "small organization" – and thereby force the agency to better consider the needs of small advisers when formulating new rules or other proposals.

The Investment Adviser Regulatory Flexibility Improvement Act (H.R. 6321), part of a larger package of financial reform bills known as the JOBS and Investment Confidence Act, passed the House by a 406 to 4 vote. It now goes to the Senate, where it is expected to be considered in the weeks ahead. The bill is given a 40 percent chance of becoming law by, which keeps tabs on pending legislation.

If passed by both Houses and signed into law by President Donald Trump, the bill would require the SEC "to revise the definitions of a ‘small business’ and ‘small organization’ for purposes of assessing the impact of the Commission’s rulemakings under the Investment Advisers Act of 1940," according to the proposed legislation’s language. The bill, which is composed of only three paragraphs, requires that the SEC make this reassessment within one year of the bill becoming law.

Both the Investment Adviser Association and the Investment Company Institute were quick to praise the House in passing the bill.

"The IAA applauds the House of Representatives for passing the Investment Adviser Regulatory Flexibility Improvement Act as part of the bipartisan JOBS and Investor Confidence Act of 2018," the association said. "The IAA strongly supports the Regulatory Flexibility Improvement Act. This legislation will require the SEC to more effectively consider the burden of its rules on smaller investment advisers, which has long been a top policy priority for the IAA."

"ICI commends House Financial Services Committee chairman Jeb Hensarling (R-TX) and ranking member Maxine Waters (D-CA) for their leadership in guiding this critical bipartisan legislation through passage by the House of Representatives," the association, which represents funds, said in its statement about the full financial package.

"This bill contains important provisions that will help spur capital formation and avoid inappropriate bank-like stress testing for regulated funds. We encourage the Senate to follow suit and pass this bipartisan bill to help promote economic growth and prevent unnecessary, burdensome regulation that would be harmful to funds and their shareholders," it continued.

Kirkland & Ellis partner and former SEC Division of Investment Management director Norm Champ also spoke well of the bill. "Requiring regulators to consider the impact of their actions on even more small businesses in the U.S. should help reduce costs for small advisers and contribute to U.S. capital formation."

How it would work

Under current SEC rules, an investment adviser is generally considered "small" if it has less than $25 million in assets under management. Given that only advisers with at least $100 million in AUM are allowed to register with the agency, one may well then ask how the SEC can consider the interests of small advisers.

This is particularly problematic when one considers that more than 7,000 of the more than 12,000 SEC-registered advisory firm, employ 10 or fewer non-clerical employees, the IAA wrote in a July 10 letter to Hensarling and Waters. The answer, the IAA said, is for the SEC to "conduct its economic analysis of the impact of regulations on a more realistic universe of smaller advisers and better tailor both regulations and guidance to these firms."

The bill specifically requires that the Commission consider just such a threshold – one based on the number of non-clerical employees – when determining a new definition of "small" as it applies to a business or organization. While the bill does not require that this methodology be used, the fact that this criterion is specifically mentioned as a possible alternative makes the intent of Congress clear, assuming it becomes law with this wording.


The burden of regulatory compliance is clearly the impetus behind the bill. "Small advisers have been significantly burdened by the cumulative impact of regulations that effectively require substantial investments in infrastructure, technology, personnel and systems relating to documentation, monitoring, operations, custody, reporting, cybersecurity and many other areas," the IAA said. While the pending legislation would not limit the SEC’s rulemaking authority or mandate any specific rules, the association said, "the SEC would have to better assess the impact of its regulations on firms that are truly small businesses and give greater consideration to appropriate alternatives that would minimize unnecessary burdens on these firms."

The bill does not provide the SEC with any new authority, said IAA vice president for government affairs Neil Simon in a separate conversation. "The agency had the ability to do this all along. What the bill does is provide the Commission with a strong nudge to move in this direction."

The concept of basing size strictly on AUM "is flawed," he said.

Among the benefits such a change in determining size would make is that the SEC would be better able to "consider the uses of scalability," Simon said, meaning that any new requirements under consideration might affect different size advisers in different ways.

The larger package

The JOBS and Investor Confidence Act, also known as "JOBS Act 3.0" in reference to the JOBS Act that Congress passed in 2013, contains 32 bills, some of which would undo parts of the Dodd-Frank Act. Among them are the

  • Modernizing Disclosures for Investors Act (H.R. 5970), which would require the SEC to study the costs and benefits of Form 10-Q reporting requirements;
  • International Insurance Standards Act (H.R. 4537), which would require that international insurance standards and agreements are aligned with domestic insurance requirements; and the
  • Crowdfunding Amendments Act (H.R. 6380), which would allow investors engaged in crowdfunding to pool their investments into a fund advised by a registered investment adviser.