The Securities and Exchange Commission voted on November 4 to adopt amendments modernizing the asset-based thresholds that determine which registered investment companies, investment advisers, and business development companies qualify as small entities under the Regulatory Flexibility Act, marking the first update in nearly three decades.
Key Takeaways
- SEC adopts first update to small entity asset thresholds for investment companies, advisers, and BDCs in nearly 30 years
- Four amendments: higher thresholds, revised fund aggregation, elimination of adviser total assets test, 10-year inflation adjustments
- Changes aim to expand RFA coverage to more firms and reduce disproportionate regulatory burden on smaller market participants
- Specific new threshold dollar amounts and effective date pending Federal Register publication
- Chairman Atkins frames update as modernization to eliminate unnecessary regulatory burdens
Executive Intelligence Brief
Four Key Amendments Adopted
The adopted rulemaking implements four structural changes to the small entity definitions. First, the Commission increased the asset-based thresholds under which investment companies, investment advisers, and business development companies are deemed small entities. Second, it updated the methodology for aggregating related funds' assets for purposes of the small entity determination. Third, the amendments eliminate the investment adviser total assets threshold entirely. Fourth, the rules provide for automatic inflation adjustments to the asset-based thresholds by SEC order every 10 years.
Regulatory Flexibility Act Context
The Regulatory Flexibility Act requires federal agencies to assess the impact of their rulemaking on small entities and consider less burdensome alternatives. The SEC's prior thresholds, unchanged for nearly 30 years, failed to account for substantial asset growth across the investment management industry. Chairman Paul S. Atkins stated that updating these definitions 'is an important step to eliminate unnecessary regulatory burdens and modernize our rulebook,' ensuring the Commission's regulatory flexibility analyses capture a more meaningful population of small entities.
Impact on Investment Advisers and Fund Complexes
The elimination of the investment adviser total assets threshold represents a significant methodological shift. Previously, advisers faced a dual test involving both assets under management and total assets. The updated aggregation rules for related funds will particularly affect fund complexes with multiple series or classes, as the revised methodology alters how combined assets are calculated against the new thresholds. The specific dollar amounts for the new thresholds were not disclosed in the press release and will appear in the Federal Register publication.
Forward Outlook and Implementation
The adopting release will be published in the Federal Register, at which point the effective date will be confirmed. The 10-year inflation adjustment mechanism, executed by SEC order rather than rulemaking, provides a predictable recalibration schedule. Market participants should review the final rule text upon Federal Register publication to assess qualification changes for specific entities and adjust compliance planning accordingly.
