SEC finalizes $1B small-entity threshold for RIAs

The Securities and Exchange Commission has raised the asset ceiling for investment advisers to qualify as small entities from $25 million to $1 billion in regulatory assets under management, pulling most registered investment advisers into the group of firms the agency must weigh when it writes new rules.

The change announced Wednesday finalizes a plan the SEC first floated in January under Advisers Act Rule 0-7. The final version goes further than that proposal, scrapping a second test that barred any adviser with $5 million or more in balance-sheet assets from counting as small.

“Updating the SEC’s definition of small entities for investment companies and investment advisers – which has not been done in nearly 30 years – is an important step to eliminate unnecessary regulatory burdens and modernize our rulebook,” SEC Chairman Paul S. Atkins said in a statement Wednesday.

Why the small-entity label matters

The Regulatory Flexibility Act of 1980 requires federal agencies to analyze how proposed rules affect small businesses. Under the RFA, agencies must also consider less burdensome alternatives when the impact is likely to be significant. An adviser that falls outside the agency’s definition of small is effectively invisible in that analysis.

Until now, almost no registered firm qualified. The old test was adopted in 1982 and last revised in 1998. It counted an adviser as small only if it managed less than $25 million, held less than $5 million in total assets and was not under common control with a larger firm. That cutoff made sense when $25 million was also the minimum for SEC registration. Congress has since raised the registration floor to $100 million.

Read more: SEC wants more ‘realistic’ view of small advisory firms by redefining them, says commissioner

According to the Investment Adviser Association’s 2026 industry snapshot, there were a record 16,544 SEC-registered firms in 2025. Only 536 of them, about 3%, met the small-entity definition. Based on the IAA snapshot, 67.4% of SEC-registered advisers – totaling more than 10,500 firms – managed less than $1 billion in 2025.

"Advisers with less than $1 billion in assets accounted for almost all of the new SEC registrations, with new registrants accounting for over a quarter of firms in that size range," the IAA's snapshot report said.

The SEC’s adopting release estimates that 11,017 advisers will have to answer the small-entity questions in Item 12 of Form ADV under the final rule. That includes about 10,180 firms that do not answer them today.

The SEC also counted exempt reporting advisers. On that basis, it said a $1 billion threshold covers about 75% of advisers, yet those firms hold less than 3% of total regulatory assets in the industry.

"These changes do not alter any substantive requirement applicable to any firm," SEC Commissioner Mark Uyeda said in a statement following the final amendments. "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." 

Weighing industry feedback

The proposal drew approximately 20 comment letters, and most supported the goal of modernizing the definition. Investor advocates, including Better Markets and the Public Investors Advocate Bar Association, warned the change could weaken investor protections, though the SEC said designating a firm as small does not reduce investor protection.

The IAA had petitioned the SEC to revisit the definition. In its generally supportive March comment letter, the group urged the commission to eliminate the $5 million total-assets test or raise it to $10 million. The SEC decided to scrap the test, concluding that balance-sheet items such as leases and equipment don't say much about the scale of an advisory business.

The agency also turned down a coalition that included the CFP Board and the Financial Planning Association, which had urged the agency to consider headcount as a measure of size. While the planning industry groups argued firms with leaner teams should count as small entities, the SEC said an employee-based test would be skewed by advisers’ heavy use of outsourcing.

The SEC noted that some commenters had apparently been confused, mistaking the small-entity regulatory AUM threshold for the $100 million minimum threshold to place an investment adviser under federal SEC regulation, as opposed to being overseen by state securities regulators. 

"Most commenters, however, appeared to understand the distinction between the RAUM Threshold and the SEC-registration threshold," the SEC said in its adopting release. "[T]he Commission is not amending the SEC-registration threshold."

The amendments are set to take effect 90 days after the adopting release appears in the Federal Register.