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The Securities and Exchange Commission’s newest rule proposal would drastically expand the number of investment advisors the agency deems “small entities,” which could significantly alter how rules and regulations affect them.
On Wednesday, the commission proposed amendments to rules clarifying which investment companies, advisors and business development companies qualify as small entities under the Regulatory Flexibility Act (initially passed by Congress in 1980). The proposed changes would increase the asset threshold for considering advisors as small from $25 million to $1 billion.
The rule mandates federal agencies to analyze (and minimize) the potential economic impact of rulemaking on smaller companies.
According to SEC Chair Paul Atkins, the proposals are “consistent with the SEC’s intent to modernize regulatory requirements” by reassessing which advisors and companies under the commission’s purview should actually be deemed 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,” Atkins said.
According to MarketCounsel CEO Brian Hamburger, the result should mean fewer “one-size-fits-all” assumptions in new rules, with “more realistic compliance times, reduced documentation requirements in some cases, and a more thoughtful cost-benefit analysis” reflecting how advisors work.
“Day-to-day, advisors won’t suddenly have fewer rules to follow,” he told Wealth Management. “But over time, the rules themselves should become more proportionate.”
According to current rules, the SEC deems an investment company a “small entity” if its net assets are under $50 million, while the agency considers an investment advisor “small” if their assets under management do not exceed $25 million. Specific asset thresholds were originally adopted in 1982 and last amended to today’s standards in 1998.
Many industry participants, including the advisor advocacy group Investment Adviser Association, have long called for the commission to boost the AUM threshold for small entity investment advisors.
For the most part, advisors cannot register with the commission unless they manage at least $100 million in assets, which makes the $25 million threshold for small entities “virtually meaningless and contrary to the legislative intent of the Reg Flex Act,” according to a letter from IAA CEO Karen Barr to the commission from 2023.
According to the rule proposal, in 2025, only 451 of the total 15,909 SEC-registered investment advisors (about 3%) were considered small entities, compared with approximately 75% before and 20% after the 1998 amendments.
In her 2023 letter, Barr emphasized that the advisory industry is primarily comprised of small businesses, with 92% of advisors employing 100 or fewer people, which accounted for 21% of the industry’s total AUM. Advisors focused on individuals also tend to be small, with an average of nine employees and $330 million in AUM.
At the time, the IAA pushed the agency to revise the rules to make employee headcount the threshold (deeming firms with 100 or fewer employees as “small”). Nevertheless, the association supports the commission’s latest proposal.
IAA General Counsel and Head of Public Policy Gail Bernstein called the proposal “an important step toward recognizing that the investment advisor industry largely consists of small businesses that face different resource constraints from larger firms and that regulation should more appropriately take these factors into consideration.”
Hamburger said the $25 million threshold had been “indefensible” for years, creating a “regulatory fiction” that treated smaller advisors like larger firms. He wasn’t surprised by the asset threshold hitting $1 billion, noting that a $500 or $750 million firm still operates more like a small business than a larger asset manager.
“That said, the precise number matters much less than the principle we see here,” he said. “What’s important is that the SEC is acknowledging that scale matters, complexity matters and regulatory impact should be assessed accordingly.”
According to Max Schatzow, a partner with RIA Lawyers, the proposal didn’t change who must register with the commission, but would qualify about 75% of SEC-registered advisors as small entities, which Schatzow considered “directionally sensible.”
“We work with many advisors managing roughly $500 million to $1 billion in assets, and while those firms are sizeable in absolute terms, they are small relative to large asset managers,” Schatzow said. “Their compliance programs—and the resources they can devote to legal and compliance—look nothing like those of the largest institutions.”
However, that $100 million threshold for SEC registration may not be set in stone.
Last April, Commissioner Mark Uyeda told an audience of federal and state regulators that the SEC should re-examine the “mid-size advisory regulatory split” separating federal from state-registered (and regulated) advisors, passed as part of the Dodd-Frank Act in 2010.
While the legislation specified $100 million as the demarcation between SEC and state registration, lawmakers also empowered regulators to change the threshold if needed. Uyeda directed SEC staff to conduct periodic evaluations on whether the split remained “optimal.”
“Doing so could help to ensure Congress’s intent that the SEC focus on the larger, more complex investment advisors while the states concentrate their resources on the smaller firms,” Uyeda said at a conference co-sponsored by the SEC and state regulators in April last year.
