House Passes Small Entity Update Act to Evaluate Size Cutoff for Advisories

The Small Entity Update Act passed the House of Representatives Tuesday by a vote of 367 to 8, moving a proposal to the Senate that could reduce regulatory burdens on some independent financial advisers. The act had passed the House Financial Services Committee unanimously in April.

The bill, initially proposed by Representative Ann Wagner, R-Missouri, would require the Securities and Exchange Commission to study and update its definition of “small entity” within one year of the bill’s passage and every five years thereafter. In its study, the SEC would have to account for the growth of the financial services industry and ensure that any definition captures “a meaningful number of entities.”

Currently, when considering compliance with multiple securities laws, the SEC defines investment advisers with less than $25 million in assets under management as small entities not required to register with the SEC.

Wagner noted in a markup hearing on the bill that it is intended to reduce regulatory burdens on small businesses and advisers affected by SEC regulations. The bill does not provide a new definition of “small entity” but requires the SEC to study changes to the definition and report its findings to Congress.

During the same markup hearing, Representative Sean Casten, D-Illinois, recommended adding a provision that would tie the definition to inflation. Wagner described the suggestion at the time as a “common sense addition” and that it should factor into the SEC’s study and report. No language requiring a peg to inflation is in the bill as passed.

Currently, advisers with less than $25 million in assets under management are prohibited from registering with the SEC, and those with $110 million or more are required to do so.

Karen Barr, the president and CEO of the Investment Adviser Association, said in an emailed statement that, “The IAA is delighted the House of Representatives has passed the Small Entity Update Act, which requires the SEC to update its small business definition. Due to an outdated definition, the SEC has not been required to explicitly consider reasonable alternatives to proposed regulations for smaller investment advisers. The IAA strongly supported this bill and urges the Senate to take it up promptly.”