Investment Advisers Are Not Being Deregulated: IAA

The president and CEO of the Investment Advisers Association (IAA) is both hopeful and apprehensive as the Trump administration pursues deregulation and workforce reductions of the federal government. But Karen L. Barr wants to be clear about one thing: Investment advisors will not see any actual deregulation at the Securities and Exchange Commission.

“The SEC is not deregulating our industry,” Barr tells Rethinking65. “Yes, the SEC is under new leadership. It is taking a look at various rules that recently got adopted and rules that were proposed but not adopted in the prior administration and evaluating whether to move forward with the ones that weren’t finalized and for the ones that are finalized.”

The SEC is providing more time and clarity for the financial industry, but it is not repealing new rules, Barr says. “So, you may be hearing about deregulation in other industries, but our industry is not being deregulated,” she emphasizes.

Praise for a New Approach at SEC

Under the leadership of acting Chairman Mark Uyeda, the SEC is moving toward a different regulatory approach, Barr says. Aligning more closely with the IAA’s own priorities, the agency is friendlier toward small businesses than it was under former chairman Gary Gensler, she says. Gensler resigned from the SEC at the close of the Biden administration.

Paul Atkins, President Donald Trump’s nominee for SEC chairman, is reportedly scheduled for a March 27 confirmation hearing before the Senate Banking, Housing and Urban Affairs Committee following months of delays.

Barr says the IAA has been “very actively” engaged in discussions about its priorities — especially easing the regulatory burden for small businesses — with all three SEC commissioners, the staff of the SEC Division of Investment Management and congressional representatives.

The SEC is lobbying on Capitol Hill for the Small Entity Update Act, which would require the SEC to assess proposed regulations’ effect on small businesses, Barr says. Under the bill, which was passed by the House but not the Senate, the SEC would be required to reduce “unnecessary burdens” on small entities and expand the number of entities covered.

“So, we are very actively engaged on both the Hill and with the SEC. We have been for years, and specifically in the last seven weeks in the new administration,” Barr says.

“Most of our industry is made up of small businesses,” she says, noting that more than half of the investment advisory firms have 10 or fewer employees, and 92% of SEC-registered investment advisors have 100 or fewer employees. “So, this is really a community of small businesses, and yet a five-person shop is regulated the same way as a firm with trillions of dollars in assets,” she says.

Positive Signs

Under Gensler, Barr says, the SEC moved away from a principle-based approach focused on fiduciary duty and adopted what she says was a prescriptive approach with “check-the-box-type” regulations that were applied to all firms, large and small.

The SEC should focus enforcement action on investor harm and fraud, not technical violations, Barr says. Under Gensler, the SEC brought enforcement actions for violations of record-keeping rules that should have been dealt with by an exam deficiency letter or other less-severe methods, she says, adding, “We didn’t think that that was an appropriate use of precious enforcement resources.”

Barr says she’s seeing positive signs from SEC leadership, including Uyeda, who in a recent speech says the SEC must work to tailor regulation to small businesses. And at a recent IAA conference, SEC Commissioner Hester Peirce says the SEC must take into account the needs of small businesses. “So, we are hopeful that with the new leadership at the SEC, we will make significant progress on how they treat small advisors that they regulate,” Barr says.

Concern About Staff Reductions

Despite past disagreements with the SEC over its enforcement policies, the IAA continues to believe that a strong SEC is essential to the health of the financial industry, Barr says.

“We are not in favor of no regulation. We are in favor of strong regulation that protects investors and facilitates capital formation.”

— Karen L. Barr, IAA

“Investor protection is very important,” she says. “We are not in favor of no regulation. We are in favor of strong regulation that protects investors and facilitates capital formation. The SEC is the agency that is most expert in overseeing investment advisors, and we believe that they are the right regulator to oversee our industry,” Barr says. “We want to see them appropriately funded and able to protect investors and facilitate capital formation.”

However, the Trump administration’s pursuit of reductions in the federal workforce in the name of tax savings has also touched the SEC. At the end of February, the agency made a $50,000 buyout offer to employees who resign or retire by April. Additionally, the Department of Government Efficiency (DOGE), which is headed by billionaire Elon Musk and has fired thousands of federal employees, has paid a visit to the SEC, Barr says.

While the results of those initiatives have not been disclosed, Barr expressed concern about possible staff cuts at the SEC.

“We want to have an SEC that is appropriately staffed and funded,” she says. “We are concerned that they’re going to be losing folks with a lot of institutional knowledge and expertise with respect to our industry, and we hope that the changes don’t result in impaired regulatory or enforcement efforts — that the that the agency remains strong and efficient.”

While federal workforce reductions have been touted as a means to reduce the federal budget and taxes, the SEC brings in more revenue to the government through its regulatory fees than it receives through its congressional appropriation.

“We need to see who and how many, to see whether there’s going to be an impact,” Barr says of the SEC staff reduction.

New Role for OMB

The SEC has traditionally been an independent agency, but critics say that independence could be weakened by a recent Trump executive order requiring that any SEC policy decisions be approved in advance by the Office of Management and Budget. Barr expresses concern that the order could impede the SEC’s work.

“It is possible that the regulatory agenda gets slowed down with this new process through OMB,” she says. “The SEC has not gone through this before, so it’s hard to tell what the actual impact might be, but it could indeed slow down some regulatory initiatives.”

More Time for Compliance

However, Barr praises the SEC for intentionally slowing down in one area — allowing more time for compliance with new regulations. The IAA has requested such extensions for six regulations, and so far, the SEC has granted relief on four, she says.

Additional Reading: Advisors Rate New Client Acquisition as Their Top Challenge 

Asked if there are any areas where the SEC could improve, Barr says the anti-money laundering rule for investment advisors needs to be strengthened. “But we haven’t seen any movement on that yet,” she says.

Another area where the SEC is making big changes is cryptocurrency. Uyeda has created a cryptocurrency task force to rework the agency’s regulation of the sector while reducing the SEC’s crypto enforcement unit. Asked if she had an opinion on that, Barr replied, “I don’t.”

Ed Prince is a writer with Rethinking65. In a four-decade career in journalism, he has served as an editor with many of New Jersey’s leading newspapers, including the Star-Ledger, Asbury Park Press and Home News.