House Committee Unanimously Approves Bill Requiring SEC to Study Size Cutoff for Advisory Firms

The Small Entity Update Act requires the SEC to revisit the ‘small entity’ definition of advisory firms every five years.

A bill known as The Small Entity Update Act was approved by the U.S. House Committee on Financial Services by a unanimous vote of 42 to 0 on Wednesday. The proposal requires the Securities and Exchange Commission to periodically reconsider which financial advisory firms are too small to be included in its regulatory umbrella. It was reported to the House of Representatives, although no timetable has been set to consider or vote on it.

The bill, initially sponsored by Representative Ann Wagner, R-Missouri, would require the SEC to study the definition of “small entity,” currently set at advisers with less than $25 million in assets under management, for the purposes of securities laws. The SEC would need to issue a report of its findings and issue new rules based on those findings. The SEC would also need to study the definition of “small entity” every five years thereafter.

Small entities are prohibited from registering with the SEC and must register instead in their respective states. The text of the bill notes that a review would take into account “the amount by which financial markets in the United States have grown since the last time the Commission amended the definition of the term ‘small entity.’” During a markup hearing held on Wednesday by the committee, Wagner said it would help small businesses and reduce regulatory burdens on small advisers.

Representative Sean Casten, D-Illinois, proposed adding a provision to the bill that would tie any future definition to an inflation index so that the definition does not become “stale” over time. Wagner said this proposal was a “common sense addition” and should be a part of the SEC study. She said she would work with Casten to add this language at a later point.

The Investment Adviser Association endorsed the bill in an emailed statement. The adviser lobbying group wrote in a response that, “The IAA believes it is critically important that the SEC meaningfully consider the unique challenges of smaller advisory firms and the cumulative impact of policy decisions on their businesses and their ability to serve the investing public.”