By Richard Casciani, Managing Director, U.S.
On January 7, 2025, the Securities and Exchange Commission (SEC) proposed amendments to the rules that define which registered investment companies, investment advisers and business development companies qualify as small entities for purposes of the Regulatory Flexibility Act (RFA). The RFA requires federal agencies to conduct certain analyses, with the goal of minimizing the significant economic impact of federal rulemaking on small entities.
Specifically, this proposal would:
- Increase the asset-based thresholds under which investment companies and investment advisers are deemed “small businesses” and “small organizations” (collectively, “small entities”)
- Update the way that related funds’ assets are aggregated for purposes of defining small entities
- Provide for inflation adjustments to the asset-based thresholds by order every 10 years
Background
For the purposes of the RFA:
- Registered investment companies (RICs): Rule 0-10 under the Investment Company Act of 1940 defines small entities by reference to net assets for investment companies
- Takes into consideration the aggregated net assets of all investment companies in the same group of related investment companies
- Registered investment advisers (RIAs): Rule 0-7 under the Investment Advisers Act of 1940 defines small entities by reference to assets under management and total assets
- Takes into consideration control relationships among investment advisers and other persons
Rule 0-10 and rule 0-7 were adopted in 1982 and were last updated in 1998. This proposal is designed to capture the types and numbers of investment advisers and investment companies that the SEC considers to be “small,” in light of the substantial growth in assets under management and net assets over the decades since the rules were last updated.
For RICs, the proposal cited growth from approximately $296.7 billion in net assets across 857 funds in 1982 to $41.6 trillion across 13,630 funds as of December 2024. As such, the share of funds deemed “small entities” fell from roughly 62.4% (1982) to 0.6% (2024).
For RIAs, the proposal indicated that growth in assets under management has significantly reduced the number of advisers that are deemed “small entities,” from approximately 17,000, or 75% of the approximately 22,500 total RIAs prior to the 1998 amendments to only 451 or 3% of the 15,909 total RIAs in 2025.
Key elements of the proposal
Increased thresholds
The proposed amendments raise the asset-based thresholds in rules that define which RIAs and RICs qualify as small entities for purposes of the RFA. Specifically, the proposal:
- Increases the regulatory assets under management (RAUM) threshold for an RIA to be deemed a “small entity” from $25 million to $1 billion
- The proposal also makes conforming changes to the RAUM threshold for an RIA’s “control relationships”[1]
- Increases the net asset threshold for an investment company to be considered a “small entity” from $50 million to $10 billion
- The proposal also replaces the phrase “group of related investment companies” for purposes of aggregating net assets among such groups with “family of investment companies” as that term is used in Item B.5 of Form N-CEN, which would allow the SEC to rely on the information reported on Form N-CEN to identify small entities
Inflation adjustments
The proposal also provides for subsequent inflation adjustments to the asset-based thresholds every 10 years, with such adjustments to be based on the Personal Consumption Expenditures Chain-Type Price Index (PCE Index), published by the Department of Commerce.
The proposal would also amend Form ADV in conformity with the threshold changes to Rule 0-7 and make certain clarifying changes.
Takeaways and comment period
If adopted, the proposed amendments would significantly increase the number of RIAs and RICs that would be deemed small entities.
Regarding investment companies, the SEC chose $10 billion to approximate the 80th percentile of fund families by aggregate average total net assets, which would capture about 80% of fund families, accounting for 22.9% of individual funds and 2.13% of total net assets as “small entities.” The SEC noted that because these percentage calculations were based on Form N-CEN data, certain investment companies were excluded from the calculations.
Regarding investment advisers, based on Form ADV reporting, only 451 of 15,909 RIAs (approximately 3%) qualified as “small entities” in 2025 under the current rules. The proposed $1 billion RAUM threshold would increase the proportion of investment advisers captured, with the SEC estimating about 15,850 of 21,650 RIAs and exempt reporting advisers (roughly 75%) fall below the proposed threshold, though this would still represent under 3% of total industry RAUM due to concentration among the largest advisers.
Notably, the proposed changes do not impact investment adviser registration thresholds.
Investment companies, investment advisers, and business development companies may wish to submit comments on the proposed revisions to the SEC’s small entity definitions. RIAs and RICs may wish to consider addressing certain questions raised by the SEC in its proposal, including, for example, whether it should adopt higher or lower thresholds for identifying small entities, whether there are other alternative metrics that could be used, such as the “types of clients” of a RIA or employee headcount, and whether an investment company that is principally advised by a “small entity” under rule 0-7 should also be deemed a “small entity.” The public comment period for the proposed rule will remain open until March 13, 2026.
The SEC’s press release, fact sheet and the proposed rule can be accessed here.
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[1] Currently, under rule 0-7, to be considered a “small entity”, an RIA also must not control, be not controlled by, or be under common control with (a “control relationship”) with (1) another investment adviser that has assets under management of $25 million or more or (2) any person (other than a natural person) that had total assets of $5 million or more on the last day of the most recent fiscal year. The SEC is proposing to change $25 million to $1 billion RAUM in the control relationship threshold and seeks comment regarding whether it should change the total assets threshold in the control relationship threshold.
