SEC Raises ‘Small Entity’ Thresholds for Funds and Advisers for First Time Since 1998

The Securities and Exchange Commission on Nov. 4 adopted amendments that raise the asset thresholds determining which registered funds, business development companies, and investment advisers qualify as small entities under the Regulatory Flexibility Act. The fund threshold rises to $10 billion from $50 million, and the adviser threshold rises to $1 billion from $25 million.

The Regulatory Flexibility Act requires federal agencies to consider the economic impact of their rules on small entities. The SEC adopted its fund and adviser definitions in 1982 and last updated them in 1998.

SEC Chairman Paul S. Atkins said in a statement that the update is “an important step to eliminate unnecessary regulatory burdens and modernize our rulebook.”

The amendments do not change any firm’s compliance obligations. They change which firms the SEC must count as small when it analyzes the cost of future rules and considers alternatives for smaller market participants.

Funds measured at the family level

Amended Rule 0-10 under the Investment Company Act of 1940 treats a fund as a small entity if its fund family has $10 billion or less in net assets. The rule covers registered investment companies and BDCs, a group that includes interval funds, tender-offer funds, and nontraded BDCs.

The SEC replaced the rule’s “group of related investment companies” test with the “family of investment companies” definition already reported on Form N-CEN. That definition groups funds that share an adviser or principal underwriter and hold themselves out to investors as related. The Form N-CEN definition covers only registered investment companies, and the SEC did not say how BDCs, which do not file the form, are grouped. The SEC’s fund-family estimates, which rely on Form N-CEN data, also exclude BDC assets. Funds in the largest complexes will not qualify because assets are aggregated across the family, while a large standalone fund with no related funds could.

According to the SEC, 62.4% of funds were small entities when the threshold was set in 1982. By 2024, the share had fallen to 0.6%, or 85 of 13,630 funds and BDCs. Based on Form N-CEN data as of December 2025, fund families at or below the new threshold account for about 22.6% of individual funds but 2.1% of fund assets.

Advisers: $1 billion and no balance-sheet test

Amended Rule 0-7 under the Investment Advisers Act of 1940 raises the regulatory assets under management threshold to $1 billion. In a change from the proposal, the SEC also eliminated the $5 million total assets test, which had disqualified advisers with larger balance sheets regardless of assets managed.

An adviser still will not qualify if it controls, is controlled by, or is under common control with another adviser that has $1 billion or more in regulatory assets under management. The SEC said the $1 billion threshold captures about 75% of advisers but less than 3% of total industry regulatory assets under management.

Both the fund and adviser thresholds will be adjusted for inflation by SEC order every 10 years. The SEC also adopted conforming amendments to Form ADV and to Rule 203-3(b), which governs hardship exemptions from electronic filing. The amendments take effect 90 days after publication in the Federal Register.

Comment response

The SEC proposed the amendments on Jan. 7 and received about 20 comment letters. The Investment Company Institute supported the $10 billion fund threshold but urged the SEC to raise it to $12 billion to reflect industry growth since the proposal’s data was compiled. The SEC declined, saying the threshold was designed to hold for 10 years rather than track one year of market movement.

Better Markets and the Public Investors Advocate Bar Association argued that the thresholds would classify too many firms as small. Better Markets proposed adjusting the 1998 levels for inflation instead. The SEC said that approach would yield a fund threshold of about $100 million, covering less than 3% of funds.

The SEC rejected the argument that the change weakens safeguards. “Designating an entity as a small entity does not reduce investor protection,” the agency wrote.

The SEC also declined requests from the ICI, the Independent Directors Council, and Federated Hermes to treat a fund and its adviser as small if either one qualified. The agency said funds and advisers face different regulatory requirements and have different resources to meet them.

The action is separate from anSEC proposal in May that would raise the small-entity total assets threshold for issuers other than investment companies to $35 million from $5 million under the Securities Exchange Act of 1934.

The SEC adopted the definitions as it weighs several proposals affecting interval funds, tender-offer funds, and BDCs, including a Sept. 30 package that would let advisers charge performance fees to regulated funds and loosen interval fund repurchase rules, and an Oct. 9 cross-trading proposal that would give fund complexes with less than $10 billion in net assets more time to comply.

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