The SEC has proposed amendments to how it defines “small entities” under the Regulatory Flexibility Act (RFA), a move that could reclassify many investment advisers and investment companies across the industry.
While the proposed changes may sound procedural, they carry real implications for how rules are applied, how burdens are assessed, and what compliance teams should prepare for as definitions evolve.
Why This Matters
Under the RFA, federal agencies must consider the economic impact of their rulemaking on small entities. That’s where the SEC’s definitions come into play, they determine which firms are officially “small” and therefore eligible for tailored regulatory treatment in certain areas.
The newly proposed amendments aim to modernize these definitions by:
- Raising asset-based thresholds used to define “small” investment advisers and funds
- Changing how related fund assets are aggregated
- Introducing inflation adjustments every 10 years to keep definitions current
For many compliance teams, this could be the difference between qualifying for special regulatory considerations or not.
What’s Changing
1. Updated Thresholds for Investment Advisers and Funds
The SEC is proposing to raise the maximum assets under management (AUM) that would qualify an investment adviser as “small.” Similarly, investment companies with higher net asset levels could still be considered “small” under the revised definitions.
This change better reflects today’s financial landscape, where inflation and market growth have rendered older definitions outdated.
2. New Aggregation Rules for Related Funds
For investment companies, the proposed amendments adjust how assets are aggregated across related funds. This ensures affiliated funds aren’t excluded from “small entity” treatment simply due to combined size, when individually they may qualify.
3. Built-in Inflation Adjustments
Going forward, the SEC would review and adjust these asset thresholds for inflation every 10 years, helping maintain long-term relevance without requiring another formal rulemaking.
Compliance Implications
Although this proposal doesn’t change day-to-day operations yet, it’s important for compliance professionals to:
- Assess how their firm is currently classified
- Determine whether the proposed thresholds would change that status
- Evaluate how “small entity” classification impacts regulatory burden under other SEC rules
While not every rule offers exemptions for small entities, those that do often tie eligibility to these definitions, especially in terms of disclosure requirements, recordkeeping, and reporting.
What Comes Next
The proposal has been published for public comment, which will remain open for 60 days after publication in the Federal Register. Compliance teams may wish to monitor feedback, track whether the final rule includes these changes, and consider participating in the comment process if the impact on their firm is significant.
In the meantime, here are a few ways compliance professionals can stay ahead:
- Review Your Firm’s Classification
Determine whether your RIA or fund currently qualifies as a small entity and whether that could change under the proposed thresholds. - Evaluate Rule Dependencies
Identify existing or future rules where small entity status affects compliance requirements, exemptions, or obligations. - Monitor the Final Rule
Compliance teams should stay tuned for when (and how) the proposed definitions are adopted, including any changes following the comment period.
