Published on
January 9, 2026
SEC proposes amendments increasing the definition of 'Small Entities' for advisors
SEC proposes raising the small-entity AUM threshold for advisors from $25M to $1B, expanding who is considered a small entity.
The Securities and Exchange Commission (SEC) has proposed significant amendments to redefine which investment advisors qualify as "small entities", potentially reshaping how federal regulations are applied to these firms. The proposal, announced on Wednesday, would raise the assets under management (AUM) threshold for advisors classified as small entities from the current $25 million to $1 billion.
This adjustment is part of broader updates to rules under the Regulatory Flexibility Act, a law enacted in 1980 to ensure federal agencies consider and minimize the economic impact of regulations on smaller businesses. The revisions aim to better reflect the modern landscape of the financial advisory industry, where the prior threshold has long been considered outdated.
Modernizing Regulatory Standards
SEC Chair Paul Atkins emphasized the importance of the proposed changes in aligning regulations with current industry realities. "The proposals are consistent with the SEC’s intent to modernize regulatory requirements", Atkins stated, explaining that the amendments would help ensure the SEC’s rules are more effective and efficient while reducing the economic burden on small entities. He added, "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."
Currently, an investment advisor is only deemed a small entity if their AUM does not exceed $25 million - a figure adopted in 1982 and last updated in 1998. Under the proposed rules, about 75% of SEC-registered advisors would qualify as small entities, compared with only 3% today. For perspective, in 1998, following the last amendment, around 20% of advisors fit the small-entity classification, a sharp decline from 75% before the update.
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Industry Support for Change
The investment advising community has generally welcomed the proposal, with many industry leaders advocating for a more realistic definition of small entities. According to Brian Hamburger, CEO of MarketCounsel, the changes could result in more tailored regulations for smaller advisors. "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", Hamburger said. However, he cautioned that "day-to-day, advisors won’t suddenly have fewer rules to follow", adding that the impact will be more gradual over time.
Karen Barr, CEO of the Investment Adviser Association (IAA), has long argued that the current $25 million threshold is inadequate. In a 2023 letter to the SEC, Barr wrote that the threshold was "virtually meaningless and contrary to the legislative intent of the Reg Flex Act." She noted that most advisors cannot register with the SEC unless they manage at least $100 million, making the current small-entity definition largely irrelevant. The IAA supports the proposed increase, which aligns more closely with the realities of the advisory industry.
According to Barr, the majority of investment advisors are small businesses. She highlighted that 92% of advisors employ 100 or fewer people and account for 21% of the industry’s total AUM. Firms focused on individual clients tend to be particularly small, with an average of nine employees and $330 million in AUM.
A Step Toward Proportionate Regulation
The proposal has also garnered support from legal experts and compliance professionals, who see the change as a step in the right direction. Hamburger called the previous $25 million threshold "indefensible" and said it created a "regulatory fiction" that treated smaller advisors as though they were on par with larger firms. He acknowledged that while firms managing $500 million to $1 billion in assets may seem sizeable, they operate more like small businesses than large asset managers. "What’s important is that the SEC is acknowledging that scale matters, complexity matters and regulatory impact should be assessed accordingly", Hamburger added.
Max Schatzow, a partner with RIA Lawyers, agreed that the proposal is a sensible move. While the new threshold would not change who must register with the SEC, it would recognize the unique challenges faced by smaller firms. "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 noted. "Their compliance programs - and the resources they can devote to legal and compliance - look nothing like those of the largest institutions."
Broader Implications for State and Federal Regulation
The SEC’s proposed threshold increase comes amid broader discussions about the regulatory divide between state and federal oversight. The $100 million AUM threshold for SEC registration, established by the Dodd-Frank Act in 2010, could also be subject to review. Last April, SEC Commissioner Mark Uyeda suggested revisiting this demarcation to ensure it remains "optimal." Uyeda emphasized that the agency’s resources should remain focused on larger, more complex firms, while smaller advisors could be better served by state regulators.
As the SEC moves forward with these proposed changes, the investment advisory industry will be watching closely. The amendments could pave the way for more proportionate and practical regulatory oversight, ensuring that small firms are no longer burdened by rules designed for much larger entities. The public will have the opportunity to provide feedback on the proposal, marking an important step in modernizing the regulatory framework for the advisory sector.
