SEC Proposes to Modernize "Small Entity" Definitions for Funds and Advisers

What You Need to Know:

• What you need to do: Identify whether your fund family is at or below ~$10 billion in aggregate net assets and whether your advisory business is under $1 billion regulatory assets under management (“RAUM”); confirm Form N-CEN “family” mappings and affiliated control relationships; prepare for revised Form ADV Item 12 disclosures; and consider submitting comments within the 60-day window.

• The SEC has proposed to raise the asset-based thresholds that define “small entities” for investment companies and investment advisers under the Regulatory Flexibility Act, significantly expanding which firms are analyzed as “small” in future SEC rulemakings.

• For funds, the “small entity” net asset threshold would increase from $50 million to $10 billion and would aggregate at the “family of investment companies” level, replacing the current “group of related investment companies” construct.

• For advisers, the “small entity” RAUM threshold would rise from $25 million to $1 billion; related “control relationship” thresholds would be conformed, and Form ADV Item 12 would be updated accordingly.

Background and Objectives

Congress’s Regulatory Flexibility Act (“RFA”) requires agencies to consider the impact of rules on small entities; the SEC’s small entity definitions for funds (rule 0-10) and advisers (rule 0-7) date to 1982 and were last updated in 1998, despite industry growth and inflation since then.  The SEC proposes to recalibrate thresholds so future analyses under the RFA more accurately capture firms facing the most acute compliance constraints due to size.

Key Elements of the Proposal

Investment Companies

An investment company would be a “small entity” if its family of investment companies has net assets of $10 billion or less, up from $50 million today.  The proposal replaces the current “group of related investment companies” with the “family of investment companies” construct as reported on Form N-CEN Item B.5, enabling the use of existing data and avoiding bespoke reporting.  The SEC cites market growth to explain the change: industry net assets increased from approximately $296.7 billion across 857 funds in 1982 to about $41.6 trillion across 13,630 funds by 2024, while the share of funds qualifying as small fell from roughly 62% to 0.6%, indicating the 1982 threshold no longer meaningfully targets smaller complexes.

Using Form N-CEN data, the ~$10.04 billion calibration aligns with the 80th percentile of fund families, capturing around 22.91% of individual funds but only about 2.13% of total assets, reflecting continued concentration among the largest complexes.  The proposal also aligns aggregation for insurance separate accounts with the Form N-CEN family concept and would no longer aggregate an insurer’s separate accounts with the general account. 

Investment Advisers

The proposal would increase the “small entity” RAUM threshold from $25 million to $1 billion.  SEC analysis indicates this would encompass roughly 75% of advisers while representing under approximately 3-4% of total RAUM due to concentration at the top of the market.  The affiliated-entity disqualification threshold would be conformed from $25 million to $1 billion RAUM to maintain the principle that entities benefiting from large-firm resources are not independently “small” under the RFA.

The adviser “total assets” prong would remain at $5 million for now, with the SEC proposing to subject any such threshold to the same inflation adjustment mechanism.  Form ADV Part 1A Item 12 would be revised to reflect the $1 billion RAUM threshold and aligned control relationship questions, and the continuing hardship exemption would be conformed to the updated small entity definition.

Periodic Inflation Adjustments

Every ten years, the SEC would adjust thresholds by order using the Personal Consumption Expenditures Chain-Type Price Index (“PCE Index”) and round to practical increments-$1 billion for fund net assets, $100 million for RAUM, and $500,000 for total assets-to keep definitions current over time.  The SEC has used the PCE Index in analogous contexts, and the decennial cadence aims to balance stability with the need for regular updates. 

Who Is Affected and How

Registered Funds and BDCs

Fund families near or below $10 billion in aggregate net assets could newly qualify as “small entities,” which would primarily affect how the SEC frames and tailors RFA analyses in future rulemakings and does not impose new substantive obligations by itself.

Investment Advisers (Registered Investment Advisors and Exempt Reporting Advisors)

Advisers under $1 billion RAUM would generally fall within the revised “small entity” definition, unless excluded by control relationships or total assets; the SEC estimates ~75% of advisers by count meet the RAUM threshold, but they collectively manage a small fraction of industry RAUM, consistent with the RFA’s focus on entities “not dominant” in their field.  Affiliates controlled by, or in control of, large organizations would remain excluded to ensure the “independently owned and operated” concept is respected. 

Practical Implications

The proposal does not itself impose new compliance obligations; its primary effect is on the scope and tailoring of future SEC RFA analyses and on which advisers must complete updated Form ADV Item 12 questions.

Firms under $1 billion RAUM should anticipate completing revised Item 12 if adopted, with the SEC estimating minimal incremental burden per adviser because the necessary data are readily available internally.  Fund complexes near the $10 billion family threshold should confirm accurate Form N-CEN “family” reporting, as aggregation will hinge on this data rather than the prior “group of related investment companies” construct.  Registered Investment Advisors should also validate control relationships and total assets for themselves and affiliates to assess small-entity status and related Form ADV responses under the conformed thresholds.

Finally, teams should build a control to refresh small-entity determinations on the SEC’s 10-year adjustment cycle using the PCE Index once the final rule sets the baseline year. 

Our Outlook

Should this proposal be approved, we expect this calibration to meaningfully expand the population treated as “small entities” in SEC analyses, especially advisers under $1 billion RAUM and fund families below ~$10 billion, while preserving guardrails that exclude firms benefitting from large-affiliate resources.

Over time, periodic PCE-based adjustments should reduce the need for wholesale updates and keep the small-entity lens aligned with market growth and inflation.

Action Items

Assess whether your fund family’s aggregated net assets fall at or below approximately $10 billion based on Form N-CEN family reporting and update internal mapping if needed to ensure alignment with the “family of investment companies” construct. 

For advisers under $1 billion RAUM, prepare to answer revised Form ADV Item 12 and confirm positions regarding total assets and control relationships under the conformed thresholds.  Consider submitting a comment on the proposal, especially regarding aggregation nuances for fund families, the adviser RAUM threshold calibration, and the inflation-adjustment cadence and rounding conventions. 

We will continue to monitor this proposal closely and provide further updates as developments occur.