Implications Of The SEC Proposal(s) For New $1B AUM Threshold(s) For Small Entities And Federal Registration

An important (albeit time-consuming) part of running an RIA is fulfilling the compliance obligations required by the firm’s regulator(s). Currently, firms with at least $100M of regulatory Assets Under Management (AUM) or that would be required to register with at least 15 states typically must register with and be overseen by the Securities and Exchange Commission (SEC), while other (smaller) firms are regulated by their home state, plus in most cases any additional state(s) in which they have at least 5 clients. However, the proportion of RIAs meeting the threshold for SEC registration has steadily increased over the years, owing to both the overall growth of the RIA model, and the development of technology allowing RIAs to scale up faster (even as they remain relatively “small” businesses, with even most SEC-registered RIAs employing only a handful of team members and managing ‘just’ a few hundred million in assets, both of which pale in comparison to the small number of mega-RIAs and asset managers that dominate most of the industry’s AUM).

Amid this backdrop, the SEC is considering a pair of changes that would change the regulatory landscape for many RIAs.

First, the SEC has issued a proposed amendment that would change the definition of a “small entity” RIA for purposes of the Regulatory Flexibility Act of 1980 (which is designed to prevent rules and regulations from creating an undue regulatory burden on small businesses) from $25M of AUM to $1B of AUM (while also considering using a revenue- or employee headcount-based threshold in lieu of an AUM-based threshold). A new threshold of $1B of AUM would increase the number of SEC-registered RIAs that qualify as “small entities” from just 3% today up to 75% (though those 75% would still only account for 3% of all RIA-managed assets given the concentration of assets in a few mega-firms!). And so if the proposed amendment is adopted (as appears likely, given fairly broad support expressed during the proposal’s comment period), the pace of SEC rulemaking would likely slow down as it would have to more carefully consider and weigh the potential impact of proposed new rules on a drastically increased number of “small entities” it oversees – likely providing a level of future regulatory relief for relatively smaller RIAs who don’t have the revenue to support hiring dedicated compliance staff to handle increased regulatory obligations.

A separate (and not yet officially proposed) change that was nevertheless hinted at by Acting SEC Commissioner Mark Uyeda in public comments last year would also increase the regulatory AUM threshold for firms to register with the SEC from the current $100M to perhaps $1B, which would have the result of shifting thousands of currently SEC-registered firms (back) to state registration (likely with many firms needing to register in multiple states given the broader geographic distribution of clients for most firms, especially in the post-COVID virtual-meeting era). While such a change would reduce the number of RIAs under SEC oversight (potentially allowing it to focus on the largest RIAs representing the greatest systemic risk for consumers, and better aligning the number of firms the SEC must oversee with its Congressionally-limited budget), it could also significantly increase the compliance burden on many RIAs that would be forced to grapple with the complexity of multi-state registration, particularly when those states’ laws and regulations don’t fully line up with each other. Which could cause larger state-registered firms to flock to affiliate with SEC-registered corporate RIA platforms that could take certain compliance obligations off of their plates (or simply render them eligible for Federal rather than state registration), opting to sacrifice some of their independence to remain SEC-registered rather than struggle with increased compliance burdens under state registration.

Ultimately, the key point is that in the 15+ years since the SEC last updated its registration threshold (and nearly 30 years since the “small entity” threshold’s last update), there have been enough changes in the RIA landscape – both in terms of average firm size and the number of states in which firms do business in the virtual meeting and niche client marketing era – that it makes sense to rethink how to divide between state and SEC registration. Because ironically, while most RIAs truly are “small” businesses that in aggregate comprise only a small fraction of industry AUM, it’s perhaps those firms (with less capacity for handling compliance burdens) that would benefit most from following a single uniform SEC standard rather than a maze of often-conflicting state-level regulations, as well as from slower pace of rulemaking that would likely result from the proposed higher “small entity” AUM threshold. So if the SEC does eventually end up raising its registration threshold, we may expect to see a bigger push for states to further standardize their securities regulations to reduce the compliance burden on state-registered firms – or else see a flood of small- and mid-sized advisory firms affiliate with corporate RIAs to avoid state-level regulation altogether!