SEC Proposes Amendments to Small Entity Definitions

January 15, 2025

On January 7, 2026, the Securities and Exchange Commission (the “SEC”) proposed amendments to its rules that would, if adopted, significantly widen the number of registered investment advisers (“RIAs”) and investment companies1 that would be considered small entities during its rulemaking process.2

The proposed amendments, among other things, would raise the asset-based thresholds in rules that define which RIAs and investment companies qualify as “small businesses” and “small organizations” for purposes of the Regulatory Flexibility Act (“RFA”) (“Small Entity Rules”).3 In its rulemaking process, the SEC is required to consider if a rulemaking is likely to have a “significant economic impact on a substantial number of small entities.” Unless the SEC determines that a particular rulemaking will not have such impact, it must conduct regulatory flexibility analyses that, among other things, consider small entities and relevant alternatives to a proposed rule. Therefore, reframing the population of “small entity” RIAs and investment companies has the potential to change the SEC’s approach to regulating such entities.  

The SEC is proposing to make the following amendments to the Small Entity Rules:

  • Increase the regulatory assets under management (“RAUM”) threshold for an RIA to be considered a “small entity” from $25 million to $1 billion;4
  • Make conforming changes to the RAUM threshold for an RIA’s control relationships;5
  • Increase the net asset threshold for an investment company to be considered a “small entity” from $50 million to $10 billion;
  • Replace 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; and
  • Provide for subsequent inflation adjustments to the asset-based thresholds every 10 years.6

The SEC is also seeking comment regarding whether it should make any changes to the $5 million total assets threshold for RIAs.7 

Conclusion

While the rule is still in the proposal stage, if adopted as proposed, we expect it to be a welcome change for a large portion of advisers and investment companies that have faced the challenges of rising compliance costs over the years. Given the items on the SEC’s current regulatory agenda, including potential amendments to the custody rules under the Advisers Act and Investment Company Act, advisers and investment companies may want to consider addressing certain questions raised by the SEC in its proposal. For example, the SEC has specifically asked 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 an 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. If you have any questions regarding the proposed rule and form amendments, please contact your Investment Management Group attorney at Seward & Kissel LLP.

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1 The term “investment companies” refers collectively to registered investment companies and business development companies but not entities excluded from the definition of investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”), such as private funds.

2 See Amendments to the “Small Business” and “Small Organization” Definitions for Investment Companies and Investment Advisers for Purposes of the Regulatory Flexibility Act, Advisers Act Release No. 6935 (Jan. 7, 2026) (“Proposing Release”).

3 See Proposing Release at 5-6 and 9. See also 5 U.S.C. 602-605. The RFA does not define “significant impact” or “substantial number” for these purposes. Unless the SEC certifies that a rulemaking will not have such an impact, it is required to conduct a regulatory flexibility analysis in connection with both a proposed rule and a final rule. See Proposing Release at 6; 5 U.S.C. 605.

4 The SEC is proposing to amend rule 0-10 under the Investment Company Act, and amend rule 0-7 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Small Entity Rules were adopted in 1982 and have not been amended since 1998.

5 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.

6 The SEC is also proposing conforming amendments to Item 12 of Form ADV, Instruction 17 of Form ADV and rule 203-3(b) of the Advisers Act.

7 To be considered a small entity, an RIA also cannot have total assets of $5 million or more on the last day of its most recent fiscal year.  The SEC is also seeking comment about conforming changes to the total assets threshold for control relationships.  See supra note 6.

 

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