On November 4, 2026, the U.S. Securities and Exchange Commission (SEC) adopted significant amendments to the rules defining which investment advisers and investment companies qualify as "small entities" under the Regulatory Flexibility Act (RFA). The rule raises the asset-based thresholds for the first time in nearly 30 years to better reflect the extensive growth of the modern asset management market. Crucially, the SEC notes that these amendments do not alter any substantive regulatory requirements for firms, but rather update the framework used by the Commission to measure and analyze the economic burden of future rule making on smaller market participants.
Key Threshold Changes
The core objective of the new rule is to ensure RFA analyses capture a meaningful population of smaller entities so future regulations can be properly calibrated. The specific updates include:
- Investment Advisers: The threshold for Regulatory Assets Under Management (RAUM) to be classified as a "small entity" has been increased from $25 million to $1 billion. The SEC estimates this $1 billion threshold captures roughly 75% of advisers yet represents less than 3% of the total industry RAUM.
- Investment Companies / Funds: The net asset threshold has been raised from $50 million to $10 billion.
- Aggregation Changes: The rule updates how related funds' assets are aggregated when calculating these thresholds.
- Elimination of Total Assets Test: The separate investment adviser total assets threshold has been completely eliminated. The previous rule required an adviser to have less than $5 million in total assets to be considered small.
- Inflation Adjustments: To avoid another multi-decade lag, the SEC will now implement inflation adjustments to these asset-based thresholds by order every 10 years.
How the Rule Impacts Future Rulemaking
Under federal law, whenever the SEC proposes a new rule, it must conduct an initial and final Regulatory Flexibility Analysis. The SEC will use the new thresholds ($1 billion RAUM for advisers and $10 billion for funds) to determine exactly which firms must be included in that study. Because the population of "small entities" has now expanded to include roughly 75% of all registered advisers, the SEC’s economic models will be forced to capture the realities of mid-sized and boutique firms, rather than just micro-entities (which can be captured only under state law in some cases).
- Forced Consideration of Disproportionate Costs: Compliance costs—such as staffing, recordkeeping, and cybersecurity infrastructure—do not scale downward proportionally with firm size. By expanding the "small entity" definition, the SEC is now legally compelled to explicitly consider how complex regulations financially burden a much broader segment of the industry (firms with up to $1 billion in RAUM).
- Tailored Exemptions and Carve-Outs: The primary purpose of an RFA analysis is to prompt the Commission to consider "alternative regulatory approaches". This means that for upcoming proposals, the SEC is far more likely to integrate explicit accommodations for mid-sized and smaller firms, such as staggered or extended compliance timelines, reduced reporting frequencies, or full regulatory exemptions.
- Legal Vulnerability for Broad Rules: If the SEC fails to properly account for the economic impact on this newly expanded group of small entities in a future rulemaking, the resulting rule faces significant risk of being challenged or struck down in federal court under the Administrative Procedure Act (APA) for failure to comply with RFA obligations.
Additional Collateral Impacts
Beyond rule text and economic analyses, the modernization of these thresholds will affect several adjacent administrative and reporting areas:
- Form ADV Conforming Changes: The SEC is implementing immediate conforming changes to Form ADV. Firms will see technical adjustments to the wording and context of items referencing small entity parameters, ensuring data collection aligns with the new definitions.
- Shifting SEC Examination Focus: Historically, SEC examination priorities and specialized risk-monitoring sweeps were frequently categorized by asset tiers. As the definition of a "small" adviser shifts from $25 million to $1 billion, the SEC’s Division of Examinations may realign its internal risk-scoring matrices, potentially affecting how firms under the $1 billion threshold are selected or prioritized for routine cycles.
- Influence on State vs. SEC Registration Dynamics: Although the threshold for SEC registration itself remains legally tied to the $100 million RAUM threshold, establishing an official regulatory definition of a "small entity" at $1 billion sets a new federal baseline. The North American Securities Administrators Association (NASAA) regularly looks to federal benchmarks to draft model rules. A gap now exists between what the SEC officially analyzes as a "small firm" ($1 billion) and where states generally lose jurisdiction ($100 million). Over time state securities regulators may adjust their own frameworks or coordination thresholds with the SEC to accommodate mid-sized advisers or adjust their own definitions of "mid-sized" or "small" firms when drafting state-level compliance exemptions.
Overall Outlook
While these changes do not impose any immediate operational or compliance mandates on firms, they signal a prospective shift in SEC economic forecasting. SEC Chairman Paul S. Atkins stated that updating these criteria is an important step to eliminate unnecessary regulatory burdens. Going forward, the SEC will be legally obligated to rigorously analyze how its proposed rules disproportionately affect mid-sized and smaller boutiques that previously fell outside the outmoded $25 million "small entity" definition. This could pave the way for more tailored regulations, exemptions, or tiered compliance timelines for firms under the new $1 billion RAUM mark.