SMALL ADVISERS AND FUNDS

SUBCOMMITTEE 

Draft Observations and Recommendations 

for the Asset Management Advisory Committee
Three Core Areas of Observations and Recommendations

MODERNIZATION OF DEFINITIONS, 

REPORTING & ECONOMIC ANALYSIS 

RELEVANT TO ASSESSING IMPACT OF 

REGULATIONS ON THE 

“TYPICAL” REGISTRANT 

TAKING MEASURE OF MARKET STRUCTURE 

ISSUES IMPACTING THE AVAILABILITY (OR 

ABSENCE) OF RESOURCES FOR 

ADVISERS/FUNDS TO MANAGE RISK WHILE 

MEETING CLIENT-SIDE DEMANDS 

CALIBRATION OF EXISTING AND FUTURE 

REGULATIONS TO CONSIDER/BALANCE 

“RISK-BASED,” “ACTIVITY-BASED,” AND 

“RESOURCE-BASED” REALITIES
Observations Relevant to Regulatory Definitions and Economic 

Analysis in Connection with Rulemaking

◦ Most registered investment advisory firms are small businesses by any common-sense definition. 

◦ As highlighted in the 2021 IAA Report, of the nearly 14,000 SEC registered advisory firms, approximately 12,300 of 

those firms (nearly 88%) reported employing 50 or fewer individuals and manage less than $2 Billion in AUM. The 

“typical” firm (median numbers) has 9 employees, has $355M in AUM, and primarily serves individual families as 

clients. These businesses have humble revenues and tight budgets. They are “small businesses” by any measure.

◦ Regulator perspective on “best practices” often mirrors/reinforces the approach taken by large institutional firms to 

risk management and compliance, setting expectations difficult to achieve (operationally or financially) for small 

advisers/funds.

◦ Lack of scale and/or leverage in operating “spaces” present unique challenges not faced as acutely by large firms.

The approach small advisers/funds must take toward risk management and compliance (as well as their approach 

to markets and counterparties) requires creativity and budgetary disciplines in order to account for a lack of 

leverage across all business needs, including access to “new issues” in the bond market, negotiation with FinTech 

vendors, licensing fee burdens, managing relationships with custodians, approaches taken to derivatives risk 

management, access to research, and deployment of cybersecurity tools (just to name a few). 

◦ The economic analysis done in the context of rulemaking initiatives and proposals that the APA and Regulatory 

Flexibility Act require is critical work that remains truly relevant to the Commission’s informed consideration of the 

impact of rules and regulations (individually or in aggregate) on the everyday lives and work of most investment 

advisory firms. The analysis should be based upon a more realistic consideration of how small firms are affected. 
Observations Impacting Definitions and Economic Analysis in 

Connection with Rulemaking

◦ The existing definitions of “Small Business,” “Small Organization,” and “Small Entity” utilized by the SEC in 

conducting economic analysis in connection with rulemaking are severely outdated. 

◦ For example, Rule 0-7 promulgated under the Investment Advisers Act of 1940 (the “Advisers Act”), defines “small 

entities” under the Advisers Act for purposes of the Reg. Flex. Act, to be those with $25 million or less in Assets 

Under Management (AUM). Given that the basic threshold for SEC registration is currently $100 million in AUM, very 

few SEC-registered advisers are deemed to be “small” for cost-benefit purposes. Similar definitional insufficiencies 

exist in other relevant rules describing “small business” and “small organization” as they pertain to registered 

investment advisers. Current definitions intended to capture small businesses are insufficient and do not help the 

Commission to fulfill important regulatory policy goals of assessing economic impact on small businesses in the 

investment advisory industry. 

◦ The Commission’s Division of Economic & Risk Analysis, historically, has engaged primarily in a rule-by-rule analysis 

of economic impacts (including assessment of the impact on small businesses in our industry). Given the breadth, 

scope, and depth of the regulatory requirements on all registrants and considering the growing aggregate or 

cumulative impact of compliance costs on the balance sheet health of small advisers/funds, economic analysis 

done in a vacuum has limited utility. While economic analysis on a rule-by-rule basis is necessary, it is insufficient to 

provide the Commission (and public commenters) the picture necessary to be fully informed in considering and 

commenting on rulemaking initiatives.
Market Structure and Regulatory Regime Observations

Where is the regulatory regime either lagging market needs, and/or disconnected from market realities? Where are 

those realities disproportionately Impacting small firms (e.g. firms with “typical,” but limited, resources)?

1. Bond/FI Issuances Migrating to Private Markets / Constraints on obtaining “New Issues” for Typical 

Advisers/Funds

2. E-delivery for notices, disclosures, approvals and signatures still not permitted as the “default”

3. Data Security Legal Regime Remains Balkanized

4. Expectation / Resource Delta in Cybersecurity 

5. Liquidity Rule and Derivatives Risk Management: Governance confusion persists 

6. Proxy Voting: Continuing “disconnect” on use of proxy voting advisory services by advisers and funds as a 

method of fiduciary fulfillment 

7. License Needs/Fees linked to agency regulations / Potential Monopolies (CUSIP and Benchmark Indices): 

CUSIP License Fee Regime has far “overreached” in the imposition of fees on advisers and funds, especially 

when advisers/funds only use the CUSIP numbers for internal recordkeeping and client reporting. Similar 

issues exist in the licensing regime for securities index providers. European regulators have been much more 

proactive with policy positions and regulatory actions that seek to curtail the overreach.
Regulatory Definitions & Economic Analysis - Recommendations

1. Modernize the definition of “Small Entities” for Regulatory Flexibility Act considerations. Modernize other 

definitions relevant to the universe of firms captured in assessing economic analysis and impact on 

investment advisers and funds operating as small businesses in the context of SEC rulemaking.

A. Acknowledge that AUM is less effective in identifying “small businesses.” Consideration of human and 

financial resources available to operate the business have much greater utility.

B. As applied to Advisers: Example - Fewer than 50 employees or annual revenue less than $25M.

C. As applied to Investment Companies (Funds): Example - Principal Adviser to fund has fewer than 50 

employees or annual revenue less than $25M.

2. Modernize Economic Analysis and Reporting.

A. Periodic Assessment and Reporting by the Commission’s Division of Economic & Risk Analysis on 

Cumulative Impacts of Regulation on Small Advisers and Funds (conducted every 5 years). 

B. Public Reporting of Economic Analysis Reports on Cumulative Impacts of Regulation on Small Advisers 

and Funds. 
Recommendations Driven by Evolution of Market Structure and 

Observations on Regulatory Lag or Disconnect 

3. Bond Market Study: We recommend that the Commission convene a Roundtable to study the drivers of the growing 

“inaccessibility” (for both small advisers and retail investors) to “new issues” in the Bond market, that has been 

exacerbated by other market developments, such as the expansion of the private debt markets (e.g., 144A offerings), 

which are less accessible to individual investors and the typical registered advisory firm/small fund). The goal should be to

facilitate a level playing field for individual investors (and the typical investment advisory firm/fund) to gain greater access

to quality “new issues” in the bond market and to determine what action can be taken to promote continued growth of 

the public market for quality “new issues” in the bond market.

4. E-delivery and E-Signatures: We recommend that the Commission move swiftly to make it legally acceptable for 

investment advisers and funds to utilize an electronic notice and access regime for delivery of all notices, disclosures, and

information as the default method of delivery of required information, with the right of any investor to opt out and 

continue to receive paper (e.g. no affirmative consent required for e-delivery). We also recommend that the Commission 

move swiftly to make it legally acceptable for investment advisers and funds to utilize electronic signatures for all client 

contracts, consents, and approvals of any nature; once again, as the default practice.

5. Regulatory Coordination on Data Security and Privacy: We recommend that the Commission’s Office of Legislative Affairs 

take an advocacy role in encouraging Congress to establish a data security and privacy law regime applicable to the 

financial services sector, centralized at the federal level. 

6. Calibrated Guidance on Cybersecurity, Business Continuity, and Disaster Recovery: We recommend that the Staff or 

Commission consider issuing guidance on “best practices” in these three important areas that is tailored separately to 

large enterprises and small businesses. 
Recommendations Driven by Evolution of Market Structure and 

Observations on Regulatory Lag or Disconnect 

6. Proxy Voting by Small Advisers and Small Funds: We recommend that the Commission and Staff consider their work on the 

use/reliance of/on proxy voting advisory firms as unfinished. We recommend that Commission and Staff fully consider the 

extent to which reliance on the issuer diligence and recommendations performed/made by proxy voting advisory firms 

enhances (rather than detracts from) the ability of small advisers and funds to fulfill their fiduciary duty in the context of 

proxy voting. 

7. Liquidity Rule and Derivatives Risk Management Program: There continues to be confusion on the balance of governance 

and oversight by the fund board (relative to the role of the investment adviser to the fund) in the context of the Derivatives 

Risk Management Program. While, under the rule, the fund’s investment adviser is not eligible to serve as the derivative risk

manager, fund boards report interest in more guidance in relation to the role of the fund’s investment adviser relative to 

the derivatives risk manager and the delineation of duties between the fund board, fund adviser, and derivatives risk 

manager. 

8. CUSIP and Index License Fee Regime: We recommend that the Commission study whether to remove specific reference 

to “CUSIP” relative to securities identifiers in its rules and regulations. We also recommend that the Commission study 

whether it has legal jurisdiction to regulate CUSIP and securities index licensing fee practices as they pertain specifically to

fee imposition on investment advisers and funds. If statutory authority exists, we recommend the Commission take 

regulatory action to limit the licensing fees charged to the issuers of the securities identified by the CUSIP number and, with 

respect to securities indices, limit licensing fees to circumstances where an adviser or fund is using reference to the index in 

an advertisement (and not in connection with regulatory and client reporting, or internal purposes). Even if the 

Commission determines that there are statutory or jurisdictional limitations on its ability to act on this, the Commission 

should take a formal public policy position and coordinate with the FTC in exploring the impact of current monopolies that 

may exist, as the European regulators have done.