SEC RIA ‘Small Entity’ Redefinition Could Affect M&A

The Securities and Exchange Commission proposed amendments that would reclassify approximately 96% of registered investment advisers as small instead of large, which could create challenges when those firms are involved in mergers and acquisitions.

The change, which the commission proposed last week, would deem as a small entity any RIA with less than $1 billion in assets under management, subjecting those firms to fewer regulations. Only 451 RIAs, or about 2.6% of registered firms, currently meet the criteria to be classified as a small entity: having less than $25 million in AUM. Small and large are the only two classifications.

As a result, the amendment would lower the compliance bar for most RIAs.

“It’s an absurd jump to go from $25 million to $1 billion—it’s a 40-times jump—but I think it’s probably more about relieving administrative burden than anything else,” says Peter Campagna, managing partner in Wise Rhino Group. “You shouldn’t have the same scrutiny as BlackRock if you were managing under $1 billion.”

While the majority of RIAs would have a reduced compliance burden under the proposed change, the change could complicate the integration of multiple firms after a merger or acquisition, if a smaller firm is acquired by one with more than $1 billion in AUM.

“While more tailored regulatory requirements for smaller RIAs are directionally positive, they could introduce additional complexity in post-acquisition integration, particularly as firms scale or are consolidated into larger platforms,” says Kim Kovalski, a managing director at MarshBerry, an investment banking and consulting firm. “That complexity is likely manageable for sophisticated buyers but may require deliberate integration planning.”

Kovalski says the difficulties firms might face with post-M&A integration could include the need to upgrade policies or reporting practices; changes in compliance staffing or systems; and designing staged integration plans to avoid regulatory missteps.

Still, given last year’s record M&A activity for RIAs and wealth managers, according to data from Echelon Partners and MarshBerry, Kovalski does not expect the appetite acquiring RIAs to wane.

Valerie Mirko, an Armstrong Teasdale partner who leads its securities regulation and litigation practice, agrees that the upward trend in investment adviser M&A activity will likely persist. She adds that individual firms may feel less pressure to sell if their owners anticipate lighter compliance burdens due to being classified as small, rather than large.

Campagna believes the regulatory changes will be felt in wirehouses, where the trend of advisers breaking away to become independent RIAs could accelerate and, in turn, fuel more M&A.

“There were [advisers] who weren’t doing it that would do it now because the bar’s even lower,” Campagna says. “That’s a whole lot of talented people.”