In early January, the U.S. Securities and Exchange Commission proposed a long-anticipated update to how it defines “small entities” for registered investment advisers, investment companies, and business development companies under the Regulatory Flexibility Act.
At its core, the proposal acknowledges a simple reality: asset growth across the advisory industry has rendered decades-old thresholds increasingly disconnected from how firms actually operate.
What the SEC Is Proposing
The SEC’s proposal would modernize the definition of a “small entity” by:
- Raising asset-based thresholds used to classify investment advisers and investment companies as small.
- Updating how assets are aggregated across related funds.
- Introducing inflation-based adjustments to these thresholds every ten years.
The objective is not deregulation. Rather, it is to ensure that when the SEC evaluates the economic impact of new rules, those analyses reflect the operational scale and resources of genuinely small firms.
As Chairman Paul S. Atkins noted in the release, the intent is to better tailor rulemaking so it minimizes unintended burdens on firms that resemble small businesses in practice, even if their headline AUM figures suggest otherwise.
Why This Matters Now
The existing thresholds date back more than 25 years. Over that period, inflation, market appreciation, and industry consolidation have dramatically altered what “scale” looks like in wealth management.
Today, a firm overseeing several hundred million dollars in client assets may still operate with a lean team, limited infrastructure, and highly personalized client service. Yet under current definitions, many such firms are swept into the same regulatory impact analyses as far larger organizations with vastly different compliance capabilities.
Industry data reinforces the point. The majority of registered investment advisers employ small teams, manage under $1 billion in assets, and account for nearly all new SEC registrations. At the same time, recent analysis suggests that midsized and smaller firms often outperform their larger peers on a per-client basis, even as the largest RIAs dominate aggregate asset growth.
In that context, the SEC’s proposal can be read as an attempt to recalibrate regulatory assumptions around size, complexity, and capacity.
What It Does — and Does Not — Change
Importantly, the proposal does not exempt smaller advisers from oversight. Firms would remain subject to the Advisers Act, examinations, and enforcement authority.
What changes is how the SEC evaluates the downstream impact of new rules. By redefining who qualifies as “small,” the Commission gains flexibility to:
- Tailor compliance expectations more closely to firm scale.
- Avoid imposing disproportionate costs on advisers that lack the economies of scale of large national platforms.
- More accurately distinguish between systemic risk and localized operational risk.
Whether this ultimately simplifies compliance or merely redistributes regulatory complexity remains an open question. The proposal will be subject to a 60-day public comment period following publication in the Federal Register, and implementation would likely unfold gradually.
The Bigger Picture
Stepping back, the proposal reflects a broader tension in the advisory industry. Asset size alone is an increasingly blunt proxy for sophistication, resilience, or client outcomes. As firms grow larger, differences between total AUM growth and per-client value creation have widened, raising questions about scalability, specialization, and service quality.
By revisiting what “small” means in regulatory terms, the SEC is implicitly acknowledging that scale in modern wealth management is multidimensional. Assets matter, but they are no longer the whole story.
For independent advisers and emerging firms, this proposal is less about relief and more about recognition: recognition that operational reality, not just balance sheet size, should inform how regulation is designed and applied.
