Statement on the Adoption of Amendments to Small Entity Definitions

Today, the Commission adopts amendments to the rules that define which investment advisers and investment companies qualify as “small entities” for purposes of the Regulatory Flexibility Act (RFA).[1] Among others, the amendments increase the amount of regulatory assets under management (RAUM) below which an adviser is considered “small” from $25 million to $1 billion[2] and increase the net asset threshold for funds to be considered “small” from $50 million to $10 billion.[3]

The RFA directs the Commission to determine if a rulemaking is likely to have a significant economic impact on a substantial number of small entities. That analysis is only useful if the definition of “small” reflects the regulated population. The small entity thresholds under Rules 0-7 and 0-10 were adopted in 1982 and last updated in 1998, and the industry has grown substantially since then.[4] Acknowledging that these thresholds have not been changed for many years, the U.S. Department of the Treasury recommended in October 2017 that the Commission review and update the small entity definitions so that the RFA analysis appropriately considers the impact on persons who should be considered small entities.[5] I am pleased that the Commission has followed through on this recommendation.

Since the last update in 1998, the number of small advisers registered with the SEC has significantly decreased. This decrease has become more pronounced since the Dodd-Frank Act of 2010 raised the SEC-registration threshold for advisers to $100 million while the RAUM threshold for “small advisers” remained at $25 million. As a result, our RFA analyses have not assessed the effects of our rulemaking on the vast majority of advisers registered with the Commission. That outcome is not consistent with the intent of the RFA or the small entity definitions, which is, in part, to ensure that the Commission considers whether its rules are appropriately calibrated so that smaller entities are not subject to regulations that may be disproportionately burdensome relative to the benefits or improvements in investor protection.

Today’s amendments would allow the Commission to capture a more meaningful population of small entities. A $1 billion RAUM threshold would represent 75% of advisers but only under 3% of the total RAUM in the industry, thus capturing many smaller advisers that individually manage much less RAUM relative to the largest advisers. A similar sentiment supports raising the small investment company threshold from $50 million to $10 billion.

These changes do not alter any substantive requirement applicable to any firm. Rather, they provide a framework for the Commission to consider the effectiveness and efficiency of our regulations on smaller entities, which may be disproportionately affected when compared to significantly larger firms. Better-tailored economic analysis should lead to better regulations that benefit investors and the markets while not serving as a barrier to entry for competition.

I thank the staff in the Divisions of Investment Management and Economic and Risk Analysis, the Office of the General Counsel, and the many other offices that have contributed to this rulemaking. I also thank the contributions of the U.S. Small Business Administration to this rulemaking and the many commenters who offered thoughtful views on the proposal.