Client Alert
Rightsizing Its Rules: SEC Proposes Significant Expansion of Small-Entity Designation for Investment Companies and Investment Advisers
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The U.S. Securities and Exchange Commission (SEC) on January 7 proposed to substantially raise the asset-based thresholds under which an investment company or investment adviser would be deemed a “small business” or “small organization” for purposes of the Regulatory Flexibility Act (RFA).[1] The RFA requires federal agencies to conduct certain analyses, with the goal of minimizing the significant economic impact of federal rulemaking on small entities. If the proposal is adopted, a substantially larger number of investment companies and investment advisers potentially would be subject to reduced regulatory and compliance burdens. The proposal also would permit the SEC to make periodic future inflation adjustments.
In addition, the SEC published a list of rules to be reviewed under the RFA that have had a significant economic impact on small entities, including certain amendments to Form ADV, certain investment company disclosures, swing pricing and liquidity risk management programs.[2]
Key Observations
- If triggered, the RFA requires the SEC to analyze how new rules would affect small entities and to consider alternatives, such as differing compliance or reporting requirements or timetables, or to exempt small entities partly or completely from the rule.[3] If the proposal is adopted, the amended definitions would apply to approximately 75% of advisers and 23% of individual investment companies.
- In publishing the list of rules, the SEC is inviting public feedback on whether the rules should be continued without change or should be amended or rescinded to minimize any significant economic impact of the rules on small entities. The review of rules under the RFA may therefore ultimately result in amendments or modifications designed to minimize the burden on small entities.
Background on the Proposal
In publishing the proposal, the SEC notes that there has been substantial growth in assets under management (AUM) and net assets over the decades since the small-entity thresholds were set, and the proposal is designed to capture the types and numbers of investment advisers and investment companies that the SEC now considers to be “small” in light of this growth.
Summary of the Proposal
If approved, the SEC’s proposal would amend the definition of “small entity” for investment companies and advisers by raising the asset thresholds as summarized below.
Investment Advisers: The proposal would increase the AUM threshold of a “small entity” for investment advisers from $25 million to $1 billion. If adopted, approximately 75% of advisers, including exempt reporting advisers, would meet the definition (only approximately 3% of registered investment advisers meet the current definition).
Investment Companies: The proposal would increase the net asset threshold for investment companies from $50 million to $10 billion. If adopted, approximately 23% of individual investment companies would meet the definition (less than 1% meet the current definition).
The proposal also would refer, for purposes of aggregating the net assets of related funds, to a “family of investment companies” as that term is used in Item B.5 of Form N-CEN rather than to a “group of related investment companies” as the term is used in the current rule.[4] Under the proposal, the differences (as noted in the below chart) may produce different outcomes and may lead certain funds that are currently considered part of the same “group” to not be part of the same “family” and vice versa. As a result, such funds would no longer be aggregated for the purposes of the small-entity threshold or would be newly aggregated.
Group of Related Investment Companies |
Family of Investment Companies |
Groups funds that have a common administrator |
Groups funds that have a common principal underwriter |
Groups funds that have either a common investment adviser or investment advisers that are affiliated persons of each other |
Groups funds that have a common investment adviser |
Does not include any private funds |
Does not include any private funds |
Periodic Inflation Adjustment: The proposal would allow the SEC to make future inflation adjustments to the asset-based thresholds by order every 10 years to ensure that the thresholds do not become less useful over time due to growth in the markets or any change in the industry.
List of Rules to Be Reviewed Under the RFA
While the SEC has published annually similar lists of rules to be reviewed under the RFA, the current administration has clearly indicated an intention to amend existing rules to “improve and modernize them” and “reduce compliance burdens.”[5] The SEC’s list of rules includes the 2016:
- Amendments to Form ADV that required advisers to include information about separately managed accounts.
- Amendments to adopt Forms N-PORT and N-CEN, amend Regulation S-X disclosure related to derivatives, and to enhance disclosure regarding securities lending activities.
- Adoption of Rule 22c-1 under the Investment Company Act of 1940 (1940 Act) to require swing pricing and related disclosure amendments.
- Adoption of Rule 22e-4 under the 1940 Act to require liquidity risk management programs and related disclosures.
Considerations for Asset Managers
Publication of the proposal and the list of rules are intended to help better tailor the SEC’s analyses of the specific regulatory challenges faced by small entities and provide a clear opportunity for public comment. Asset managers should consider whether to submit comments, particularly with regard to the economic impact of rules on the list and how such rules could be modified to reduce regulatory burden and costs.6
[1] Amendments to the “Small Business” and “Small Organization” Definitions for Investment Companies and Investment Advisers for Purposes of the Regulatory Flexibility Act, Investment Company Act Release No. IC-35864 (January 7, 2026).
[2] List of Rules to Be Reviewed Pursuant to the Regulatory Flexibility Act, Investment Company Act Rel. No. 35865 (January 7, 2026).
[3] If a proposed rule triggers certain requirements, the RFA requires an agency to discuss flexibility for small entities such as “(1) the establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation, or simplification of compliance and reporting requirements under the rule for such small entities; (3) the use of performance rather than design standards; and (4) an exemption from coverage of the rule, or any part thereof, for such small entities.”
[4] The current rule is set forth in 17 CFR § 270.0-10.
[5] Chairman Paul Atkins, “Statement on the Spring 2025 Regulatory Agenda” (September 4, 2025).
[6] Comments are due on the proposal 60 days after its publication in the Federal Register. Comments are due on the list on February 11, 2026.
