Defining Small: SEC Proposal Could Shift Regulatory Burdens for Advisers and Investment Companies

On January 7, the Securities and Exchange Commission (SEC) proposed amendments (the Proposal) to raise the small entity thresholds for purposes of the Regulatory Flexibility Act (RFA) for investment companies and advisers. The RFA requires the SEC, among other federal agencies, to conduct certain analyses, with the goal of minimizing the significant economic impact of rulemaking on small entities and the amendments are designed to help the SEC better tailor its analyses to address the specific regulatory challenges that these small entities face and consider adapting its rulemaking accordingly.

“The Commission has a longstanding commitment to understanding and addressing the concerns of small entities. Today’s proposal – consistent with the SEC’s intent to modernize regulatory requirements – would further this commitment by more accurately capturing the types and numbers of investment advisers and investment companies that are ‘small.’ This, in turn, would help the Commission more appropriately promote the effectiveness and efficiency of its regulations, with the goal of minimizing the significant economic impact on small entities.” – Paul Atkins, SEC Chairman

Key Takeaways

• Although the Proposal would not impose new substantive compliance obligations, it would significantly expand the population treated as “small entities” for future SEC rulemakings, potentially influencing scoping, tailoring and cost analyses going forward.
• The Proposal would primarily impact the way the SEC conducts its economic analysis required when proposing and adopting new rules, as well as its obligations to periodically reevaluate the economic impact of its existing rules.
• The Proposal would substantially raise asset-based thresholds, introduce an inflation adjustment mechanism, and make related changes to Form ADV and hardship exemptions.
• Over time, clients should anticipate that future SEC rulemakings may include tailored obligations, staggered compliance dates, or scoped exclusions for entities meeting the revised “small” definitions.
• The Proposal does not affect the current AUM thresholds for SEC investment adviser registration, notwithstanding indications that the SEC Staff may reevaluate such standards.
• More investment advisers would be required to complete Item 12 of Form ADV, which collects information about whether an adviser is a “small business” for purposes of the RFA.

Key changes for investment advisers. The Proposal would raise the regulatory assets under management (RAUM) threshold for “small entity” advisers under the Advisers Act from $25 million to $1 billion, aligning size standards with the contemporary distribution and concentration of RAUM across the industry.  

Key changes for investment companies. The Proposal would increase the net asset threshold for “small entity” funds under the Investment Company Act from $50 million to $10 billion, reflecting growth and concentration in the fund industry since 1982 and seeking to capture entities more likely to face scale disadvantages in bearing regulatory costs.  

Form ADV updates. To align reporting with the revised standards, Form ADV Part 1A, Item 12 would be updated to require completion by advisers with less than $1 billion RAUM (up from $25 million), and the item would provide a clearer explanation of its role in determining “small entity” status. It is worth noting the somewhat anomalous result of the SEC’s intent to reduce burdens on small investment advisers by requiring that greater numbers of advisers be required to complete Form ADV Item 12.

Katten Attorneys will continue to monitor developments related to the proposed rule amendments. Comments are due within 60 days after Federal Register publication.