SEC Proposes Increasing Small Entity Asset Thresholds for Advisers and Funds

The SEC proposed amending rules "that define the terms 'small business' and 'small organization' ... to increase the asset-based thresholds used in those definitions."  

In the proposed rulemaking, the SEC explained that the amendments would significantly raise the quantitative standards for determining small entity status to reflect industry growth and inflation since the last update in 1998. The SEC said the proposal would increase the net asset threshold for investment companies from $50 million to $10 billion and raise the regulatory assets under management ("RAUM") threshold for investment advisers from $25 million to $1 billion.

The SEC said the amendments were needed because: (i) the current thresholds fail to accurately capture the population of small entities due to significant market evolution over the last two decades; (ii) for investment companies, aggregating net assets of a "family of investment companies" at a $10 billion threshold recognizes "economies of scale" and is designed to capture approximately 80% of fund families; (iii) for investment advisers, increasing the RAUM threshold to $1 billion addresses asset concentration and would classify "approximately 75% of advisers" as small entities, compared to just 3% under current rules; and (iv) the inclusion of an automatic inflation adjustment mechanism using the PCE Index every ten years ensures the thresholds remain meaningful without requiring frequent new rulemaking.

The SEC also proposed conforming amendments to Form ADV Item 12 and Rule 0-7 to align reporting and control relationship disqualifications with the new $1 billion threshold. The agency noted that hardship exemptions for electronic filing would also be updated to apply to advisers meeting the new definition.

Comments on the proposal must be submitted on or before 60 days after the date of publication in the Federal Register.