# Conformed to Federal Register version > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A441fc16447dd6e29 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text Conformed to Federal Register version SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 270, 275, and 279 [Release Nos. IA-6935; IC-35864; File No. S7-2026-01] RIN 3235-AN39 Amendments to the “Small Business” and “Small Organization” Definitions for Investment Companies and Investment Advisers for Purposes of the Regulatory Flexibility Act AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: The Securities and Exchange Commission (the “Commission” or the “SEC”) is proposing to amend the rules under the Investment Company Act of 1940 (the “Investment Company Act”) and under the Investment Advisers Act of 1940 (the “Advisers Act”) that define the terms “small business” and “small organization” for purposes of the Regulatory Flexibility Act (the “RFA”) to increase the asset-based thresholds used in those definitions. The Commission also is proposing a mechanism for periodic future inflation adjustments of the assetbased thresholds used in these definitions. The Commission further is proposing amendments to Form ADV and the rule providing continuing hardship exemptions from filing electronically for investment advisers in connection with the proposed amendments. DATES: Comments should be received on or before March 13, 2026. ADDRESSES: Comments may be submitted by any of the following methods: Electronic Comments: • Use the Commission’s comment form (https://www.sec.gov/comments/s7-202601/small-entity-definition-amendments-investment-advisers-investment-companies); or 1 Conformed to Federal Register version • Send an email to rule-comments@sec.gov. Please include File Number S7-2026-01 on the subject line. Paper Comments: • Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number S7-2026-01. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method of submission. The Commission will post all comments on the Commission’s website (https://www.sec.gov/comments/s7-202601/small-entity-definition-amendments-investment-advisers-investment-companies). Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission’s website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by email. A summary of the proposal of not more than 100 words is posted on the Commission’s website (https://www.sec.gov/rules-regulations/2026/01/s7-2026-01). FOR FURTHER INFORMATION CONTACT: Andrew Deglin, Senior Counsel, Amanda Hollander Wagner, Senior Special Counsel, or Brian McLaughlin Johnson, Assistant Director, Investment Company Regulation Office, at (202) 551-6792, Alexander Haer, Attorney-Adviser, 2 Conformed to Federal Register version Neema Nassiri, Senior Counsel, Sirimal R. Mukerjee, Senior Special Counsel, or Robert Holowka, Acting Assistant Director, Investment Adviser Regulation Office, at (202) 551-6787, Division of Investment Management, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-8549. SUPPLEMENTARY INFORMATION: The Commission is proposing for public comment amendments to 17 CFR 275.0-7 (“rule 0-7”) and 17 CFR 275.203-3(b) (“rule 203-3(b)”) under the Advisers Act, 17 CFR 270.0-10 under the Investment Company Act (“rule 0-10” and, together with rule 0-7, the “Small Entity Rules”), and Form ADV (17 CFR 279.1) under the Advisers Act. 3 Conformed to Federal Register version TABLE OF CONTENTS I. Introduction .............................................................................................................. 5 A. Background ............................................................................................................. 5 1. The Regulatory Flexibility Act of 1980 ............................................................ 9 2. Investment Company Size Standards.............................................................. 11 3. Investment Adviser Size Standards ................................................................ 14 B. Overview of the Proposal...................................................................................... 18 II. Discussion................................................................................................................ 20 A. Proposed Amendments to Rule 0-10 of the Investment Company Act ................ 20 1. Raising the Net Asset Threshold..................................................................... 20 2. Group Definition Amendments....................................................................... 27 B. Proposed Amendments to Rule 0-7 of the Advisers Act ...................................... 36 1. The RAUM Threshold .................................................................................... 36 2. The Total Assets Threshold ............................................................................ 47 3. The Control Relationship Threshold............................................................... 51 4. Form ADV Amendments ................................................................................ 55 C. Periodic Future Adjustments................................................................................. 59 III. Economic Analysis ................................................................................................. 65 IV. Paperwork Reduction Act ..................................................................................... 71 A. Introduction ........................................................................................................... 71 B. Proposed Amendments to Form ADV .................................................................. 71 C. Proposed Amendments to Rule 0-7 of the Advisers Act and Rule 0-10 of the Investment Company Act ..................................................................................... 73 D. Total Estimated Burden ........................................................................................ 74 E. Request for Comments .......................................................................................... 74 V. Regulatory Flexibility Act Certification .............................................................. 76 VI. Consideration Of Impact On The Economy........................................................ 78 VII. Other Matters ......................................................................................................... 78 Statutory Authority ........................................................................................................ 78 4 Conformed to Federal Register version I. INTRODUCTION A. Background The Commission has a longstanding commitment to understanding and addressing the concerns of small entities and has established the Office of Small Business Policy, the Office of the Advocate for Small Business Capital Formation (the “Small Business Advocate Office”), and the Small Business Capital Formation Advisory Committee to be responsive to such concerns. 1 In the context of rulemaking, the Commission tailors its regulations to the relevant characteristics of regulated entities and weighs the impact of its rules on small entities, including through performing analyses under the RFA. A purpose of the RFA is to promote the effectiveness and efficiency of regulations, including through consideration of alternative regulatory approaches, with the goal of minimizing the significant economic impact on small entities consistent with the 1 The Office of Small Business Policy in the Division of Corporation Finance, which was originally established by the Commission in 1979, assists companies seeking to raise capital through exempt or smaller registered offerings and answers interpretive questions on federal securities laws that may affect small businesses. See Office of Small Business Policy Division of Corporation Finance, available at https://www.sec.gov/resources-small-businesses/office-small-business-policy-division-corporation-finance. Pursuant to the SEC Small Business Advocate Act of 2016, the Commission in 2019 created its Small Business Advocate Office to advocate within the Commission and externally for practical solutions to challenges faced by small businesses and their investors. See 15 U.S.C. 78d and 78qq; see also Office of the Advocate for Small Business Capital Formation, available at https://www.sec.gov/about/divisionsoffices/office-advocate-small-business-capital-formation. The Commission’s Small Business Advocate Office provides an annual report to Congress that serves as a resource on the dynamics of small business capital raising and includes data-driven policy recommendations based on the office’s feedback from and engagement with small businesses and their investors. Office of the Advocate for Small Business Capital Formation, available at https://www.sec.gov/about/divisions-offices/office-advocate-small-businesscapital-formation. Pursuant to the SEC Small Business Advocate Act of 2016, the Commission also established the Small Business Capital Formation Advisory Committee (which succeeded the Advisory Committee on Small and Emerging Companies, whose term expired in 2017) to provide a formal mechanism for the Commission to receive advice and recommendations from market participants on Commission rules, regulations, and policy matters relating to small businesses. See Small Business Capital Formation Advisory Committee, available at https://www.sec.gov/about/advisory-committees/smallbusiness-capital-formation-advisory-committee. 5 Conformed to Federal Register version stated objectives of applicable statutes. 2 The Commission is required to determine if a rulemaking is likely to have a “significant economic impact on a substantial number of small entities” under the RFA. 3 Unless the Commission certifies that the rulemaking will not have such an impact, the Commission is required to conduct a regulatory flexibility analysis both during the proposal and final stages of adopting a rule. 4 The Small Business Act gives the Administrator of the U.S. Small Business Administration (the “SBA”) authority to establish small business size standards for all Federal agencies, in the absence of other specific statutory authority. 5 An agency may nevertheless prescribe its own small business size standard pursuant to section 601(3) of the RFA if, as described in 13 CFR 121.903(c), the agency consults with the SBA Office of Advocacy and the size standard will be used for the sole purpose of performing a regulatory flexibility analysis. 6 Allowing agencies to establish their own definitions for the terms “small business,” “small organization,” and “small governmental jurisdiction” for purposes of the RFA analyses gives agencies flexibility in applying the provisions of the RFA. 7 2 Pub. L. 96–354, §2, Sept. 19, 1980, 94 Stat. 1164; 5 U.S.C. 601–612. 3 See 5 U.S.C. 602. The RFA does not define “significant economic impact” or “substantial number of small entities.” 4 5 U.S.C. 605. 5 15 U.S.C. 632(a)(2). 15 U.S.C. 632(a)(1) sets forth the default standard for a “small business concern” as “one which is independently owned and operated and which is not dominant in its field of operation.” 6 13 CFR 121.903(c). See also Small Business Size Regulations; Size Standards for Programs of Other Agencies, 67 FR 13714 (Mar. 26, 2002). 7 5 U.S.C. 601. Under the RFA, the term “small entity” has the same meaning as the terms “small business,” “small organization,” and “small governmental jurisdiction” as defined under the RFA, unless the agency has established a definition of such term. In the latter case, the definition of the term is instead what was established by the agency. 6 Conformed to Federal Register version As described in more detail below, the Commission in 1982 adopted rule 0-7 for investment advisers and rule 0-10 for investment companies to define “small business” and “small organization” for purposes of Commission rulemakings under the Advisers Act and Investment Company Act, respectively. 8 These definitions were last amended in 1998 9 and, in connection with outreach to small entities, the Commission has subsequently received requests to update the definitions. 10 8 See Final Definitions of “Small Business” and “Small Organization” for Purposes of the Regulatory Flexibility Act, Investment Company Act Release No. 12194 (Jan. 28, 1982) [47 FR 5215 (Feb. 4, 1982)] (“1982 Adopting Release”). Unless otherwise specified, the term “investment companies” or “funds” in this release refers collectively to registered investment companies and business development companies but not entities excluded from the definition of investment company under the Investment Company Act such as private funds. 9 See Definitions of “Small Business” or “Small Organization” Under the Investment Company Act of 1940, Investment Advisers Act of 1940, the Securities Exchange Act of 1934, and the Securities Act of 1933, Investment Company Act Release No. 23272 (June 24, 1998) [63 FR 35508 (June 30, 1998)] (“1998 Adopting Release”). 10 See, e.g., Report on the 43rd Annual Small Business Forum (Sept. 20, 2024) (describing how participants in the Commission’s 2024 Small Business Forum recommended that the Commission revise the definition of “small entity” under the RFA in order to better assess regulatory costs), available at https://www.sec.gov/files/2024-oasb-annual-forum-report.pdf; Investment Adviser Association; Petition for Rulemaking to Amend the Definition of “Small Entity” in Rule 0-7 under the Investment Advisers Act of 1940 for Purposes of the Regulatory Flexibility Act (Sept. 14, 2023) (“IAA Petition”) (requesting that the Commission amend rule 0-7 to use the number of employees of an investment adviser as the appropriate size standard for purposes of determining the impact of regulations on small investment advisers), available at https://www.sec.gov/files/rules/petitions/2023/petn4-811.pdf; SEC Asset Management Advisory Committee, Final Report and Recommendations for Small Advisers and Funds (Nov. 3, 2021) (“AMAC Report”) (recommending that the Commission modernize the definitions of “small entities” for RFA considerations), available at https://www.sec.gov/files/final-recommendations-amac-sec-small-advisersand-funds-110321.pdf; and U.S. Department of the Treasury, A Financial System That Creates Economic Opportunities: Capital Markets (Oct. 6, 2017) (stating that thresholds for small entity definitions under the Investment Company Act and the Advisers Act have not been changed in many years), available at https://home.treasury.gov/system/files/136/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf. 7 Conformed to Federal Register version Under rule 0-7, an investment adviser is deemed a small entity if it: (i) has regulatory assets under management (“RAUM”) of less than $25 million (the “RAUM Threshold”); 11 (ii) did not have total assets of $5 million or more on the last day of the most recent fiscal year (the “Total Assets Threshold”); and (iii) does not control, is not controlled by, and is not under common control with (a “control relationship”) another investment adviser that has assets under management of $25 million or more, or any person (other than a natural person) that had total assets of $5 million or more on the last day of the most recent fiscal year (the “Control Relationship Threshold”). Under rule 0-10, an investment company is deemed a small entity if it, together with other investment companies in the same group of related investment companies, has net assets of $50 million or less as of the end of its most recent fiscal year. 12 A group of related investment companies is defined, with respect to management companies, as: two or more management companies (including series thereof) that: (1) hold themselves out to investors as related companies for purposes of investment and investor services; and (2) either (i) have a 11 Rule 0-7(a)(1) does not directly refer to the term “regulatory assets under management” for purposes of the RAUM Threshold but instead references “assets under management, as defined under Section 203A(a)(3) of the [Advisers] Act and reported on [the investment adviser’s] annual updating amendment to Form ADV[.]” Section 203A(a)(3) of the Advisers Act defines “assets under management” to mean “the securities portfolios with respect to which an investment adviser provides continuous and regular supervisory or management services,” and rule 203A-3 under the Advisers Act further provides that such amount should be determined “as reported on the investment adviser’s Form ADV.” 17 CFR 275.203A-3. In turn, Form ADV requires investment advisers to calculate and report “the securities portfolios for which [they] provide continuous and regular supervisory or management services” as their “regulatory assets under management.” Instruction 5.b. of Form ADV Part 1A; see also Rules Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers Act Release No. 3221 (June 22, 2011) [76 FR 42950 (July 19, 2011)] (using the term “regulatory assets under management” to implement a uniform method to calculate and report assets under management for Form ADV and other regulatory purposes). We use the term “regulatory assets under management” throughout this release because investment advisers are familiar in practice with the term in connection with their Form ADV reporting and other Advisers Act compliance obligations. 12 See 17 CFR 210.6-04 (Regulation S-X section generally applicable to balance sheets filed by registered investment companies and business development companies, including requirements for disclosure of net assets). 8 Conformed to Federal Register version common investment adviser or have investment advisers that are affiliated persons of each other; or (ii) have a common administrator. 13 1. The Regulatory Flexibility Act of 1980 The RFA requires that the Commission conducts an initial regulatory flexibility analysis (an “IRFA”) in connection with a proposed rule and a final regulatory flexibility analysis (a “FRFA”) in connection with a final rule, subject to certain exceptions. 14 Each IRFA is required to include, among other items, a description of the reasons why action by the agency is being considered and a description of and, where feasible, an estimate of the number of small entities to which the proposed rule would apply 15 as well as a description of any significant alternatives to the proposed rule that accomplish the stated objectives of applicable statutes and that minimize any significant economic impact of the proposed rule on small entities. 16 The IRFA, or a summary of the IRFA, must be published in the Federal Register at the time of the publication of the proposed rule. 17 This gives the public the opportunity to review the IRFA and provide comments on the agency’s analysis. 13 Rule 0-10(a). In the case of unit investment trusts (“UITs”), a group of related investment companies is defined as two or more UITs (including series thereof) that have a common sponsor. 14 5 U.S.C. 603–604. See also 5 U.S.C. 601(2) (RFA does not apply to a rule that is not considered a “rule” under the RFA) and 5 U.S.C. 605(b) (IRFA and FRFA are not required if an agency certifies the rule will not have a significant economic impact on a substantial number of small entities). 15 See 5 U.S.C. 603 (setting forth the requirements for the IRFA). 16 See id. (requiring the description to discuss significant alternatives such as “(1) the establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation, or simplification of compliance and reporting requirements under the rule for such small entities; (3) the use of performance rather than design standards; and (4) an exemption from coverage of the rule, or any part thereof, for such small entities”). 17 Id. 9 Conformed to Federal Register version The FRFA complements the IRFA and requires the agency to include, among other items: a statement of the need for, and objectives of, the rule; a statement of the significant issues raised by the public comments in response to the IRFA, a statement of the assessment of the agency of such issues, and a statement of any changes made in the proposed rule as a result of such comments; the response of the agency to any comments filed by the Chief Counsel for Advocacy of the SBA; and a description of the steps the agency has taken to minimize the significant economic impact on small entities. 18 The effect of the IRFA and FRFA elements collectively is that agencies take small entity considerations and relevant alternatives into account when proposing rules, and then go through a particular process in weighing public input on the IRFA and small entity considerations when adopting these rules. The Commission is subject to other substantive requirements under the RFA, in addition to the IRFA and FRFA. The Commission must establish plans for periodically reviewing rules that have or will have a significant economic impact on a substantial number of small entities 19 and must publish regulatory flexibility agendas semiannually in the Federal Register that describe rules it is considering that may have a significant economic impact on a substantial number of small entities. 20 The Chief Counsel for Advocacy of the SBA must monitor compliance with the requirements created by the RFA and must provide a report annually to Congress and the President on its findings.21 Small entities also have legal recourse when 18 5 U.S.C. 604 (setting forth the requirements for the FRFA). 19 5 U.S.C. 610. The plans should provide for the review of such rules within 10 years of the publication of such rules as the final rules. However, completion of the review may be extended by up to 5 years if the head of the agency determines that completion is not feasible by the established date. Id. 20 5 U.S.C. 602. 21 5 U.S.C. 612. 10 Conformed to Federal Register version adversely affected by final agency rules subject to the RFA—in 1996, Congress passed the Small Business Regulatory Enforcement Fairness Act (“SBREFA”), which provides small entities an avenue for judicial review of an agency’s compliance with certain of the requirements created by the RFA, including the FRFA. 22 2. Investment Company Size Standards a. Initial Size Standards Shortly after Congress enacted the RFA, the Commission proposed and adopted rules to define which of the entities it regulates would qualify as “small entities” for purposes of the RFA. 23 While the SBA generally expressed its size standards in terms of number of employees or average annual receipts, the Commission determined that neither approach was appropriate for investment companies. 24 First, investment companies are typically externally managed and have few, if any, employees. Additionally, investment companies primarily generate revenue through capital appreciation and other investment returns, not receipts from the sale of goods or services. Even if the income from dividends and interest were considered receipts, investment companies 22 5 U.S.C. 611; see Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C., 15 U.S.C., and as a note to 5 U.S.C. 601). Small entities are entitled to judicial review of agency compliance with the requirements of sections 601, 604, 605(b), 608(b), and 610 in accordance with Chapter 7 of Part I of Title 5 of the U.S. Code, and agency compliance with sections 607 and 609(a) is judicially reviewable in connection with judicial review of section 604. 23 Proposed Definitions of “Small Business” and “Small Organization” for Purposes of the Regulatory Flexibility Act, Investment Company Act Release No. 11694 (Mar. 20, 1981) [46 FR 19251 (Mar. 30, 1981)] (“1981 Proposing Release”); 1982 Adopting Release, supra footnote 8. 24 1981 Proposing Release, supra footnote 23, at section II.F; see also 1982 Adopting Release, supra footnote 8 (the definition of “small” was proposed “[i]n view of the apparent absence of appropriate standards” set forth in the Small Business Act, RFA, or the regulations promulgated by the SBA). 11 Conformed to Federal Register version with different investment objectives would have varying receipts depending upon the investment objective of the company and not necessarily because of a given investment company’s size. 25 For investment companies, the Commission instead developed the initial threshold by analyzing a sample of investment companies’ adjusted expense ratios and identifying a net asset threshold below which funds typically disclosed higher than average expense ratios. 26 The Commission’s rationale was that those funds that already experienced high expenses as a percentage of net assets would not be as well-positioned to bear regulatory costs. Based on the analysis of expense ratios, the Commission ultimately adopted a threshold that deemed an investment company a small entity if it had $50 million or less in net assets as of the end of its most recent fiscal year. 27 At the time of adoption, approximately 62% of investment companies met the definition of a “small entity” for the purposes of the RFA. b. Amendments to Size Standards As originally adopted, the definition of “small entity” focused only on individual investment companies’ assets—that is, whether a given investment company was a small entity depended exclusively on the net asset size of that investment company. In 1996, however, the SBA adopted rules that, depending on certain facts and circumstances, treat multiple entities that 25 See also infra footnote 62 (discussing the AMAC Report, which recommends defining small funds based on whether the fund’s adviser has fewer than 50 employees or annual revenue less than $25 million). 26 See 1981 Proposing Release, supra footnote 23 at section II.F. An expense ratio is the quotient of expenses divided by average net assets. The adjusted expense ratio used for this analysis was computed by subtracting any taxes, interest, securities loan fees, or dividends from securities sold short from the fund's total expenses and dividing the remaining total by average net assets. 27 To arrive at this threshold, the Commission analyzed the adjusted expense ratios of a random sample of 500 investment companies. The Commission calculated the average (mean) adjusted expense ratio plus one standard deviation and identified the population of funds whose adjusted expense ratio exceeded that amount. The Commission then identified the range of sizes for funds in that higher expense group— ranging from approximately $6 million to $47.2 million in net assets—and set the threshold at $50 million to ensure that the largest fund within the high expense group would be deemed a “small entity.” 12 Conformed to Federal Register version have substantially identical business interests as a single entity. 28 Shortly thereafter, the Commission amended rule 0-10 to provide that “small entity” means “an investment company that, together with other investment companies in the same group of related investment companies, has net assets of $50 million or less.” 29 Therefore, while the “small entity” designation still applied to individual funds, whether any individual fund was deemed small depended upon the aggregate net assets of all funds within its respective “group of related investment companies.” A group of related investment companies was defined to include two or more management companies (including series thereof) that: (i) hold themselves out to investors as related companies for purposes of investment and investor services; and (ii) either (A) have a common investment adviser or have investment advisers that are affiliated persons of each other; or (B) have a common administrator. 30 For unit investment trusts, “group of related investment companies” was defined as two or more unit investment trusts (including series thereof) that have a common sponsor. 31 Finally, the Commission created a special rule for insurance company separate accounts, which requires that the assets of any separate account be cumulated with the 28 See Small Business Size Standards, 61 FR 3280-01 (Jan. 31, 1996); see also 13 CFR 121.103 (“How does SBA determine affiliation?”). The SBA size standards consider if entities are affiliated by such factors as control, management, ownership, and contractual relationships in determining whether an entity is “independently owned and operated,” and thus, “small.” 15 U.S.C. 632(a)(1). These relationships allow the “small” affiliates to rely on a larger entity that centralizes administrative and compliance systems for all affiliates, significantly reducing regulatory burdens for each individual affiliate. 29 1998 Adopting Release, supra footnote 9. 30 Rule 0-10(a)(1). The investment company itself, not the group, continued to be the entity considered “small” for the purposes of the RFA. 31 Rule 0-10(a)(2). 13 Conformed to Federal Register version assets of the general account and all other separate accounts of the insurance company to determine whether the separate account is a small entity. 32 The shift to aggregating assets across groups of related investment companies reflected the Commission’s understanding that funds within a complex typically use the same administrative, management, and compliance systems to oversee all the funds within the complex, so fees imposed on the fund by the adviser or administrator typically reflect economies of scale that the adviser or administrator achieves from managing other funds. 33 Because the Commission did not also change the net asset threshold, the requirement to aggregate the net assets of all funds within a group of related investment companies had the effect of substantially reducing the percentage of funds deemed “small entities” under rule 0-10. Shortly after this amendment, the Commission estimated that about 9% of investment companies were “small” for the purposes of the RFA. 34 3. Investment Adviser Size Standards a. Initial Size Standards The Commission initially adopted definitions for “small business” and “small organization” pursuant to the RFA for investment advisers at the same time as it did for 32 Rule 0-10(b). 33 Definitions of “Small Business” or “Small Organization” Under the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Exchange Act of 1934, and the Securities Act of 1933, Investment Company Act Release No. 22478 (Jan. 22, 1997) [62 FR 4106 (Jan. 28, 1997)] (“1997 Proposing Release”), at section II.A. 34 Deregistration of Certain Registered Investment Companies, Investment Company Act Release No. 23588 (Dec. 4, 1998) [63 FR 69236 (Dec. 16, 1998)] (“Of approximately 3900 active registered investment companies (including BDCs), 339 funds are small entities.”); see also 1998 Adopting Release, supra footnote 9, at text following n.35 (estimating that about 400 investment companies would be treated as small businesses under the amendments). 14 Conformed to Federal Register version investment companies. 35 As noted above, the Commission did not adopt what it saw as the most relevant of the SBA size standards for “small entities,” which are generally based on an entity’s number of employees or average annual receipts. It did not do so because: (i) the Commission did not have sufficient information regarding investment advisers to apply these standards, (ii) the advisory industry is not generally labor intensive, and (iii) it was unlikely that any investment advisers would be larger than the most-relevant standards that were then being used or considered by the SBA. 36 The Commission initially chose to define investment advisers as small entities using two alternative thresholds. The first threshold required that an investment adviser manage assets with a total value of $50 million or less (measured in assets under management instead of net assets as for investment companies) because of what the Commission at that time saw as the similarities between the investment company and investment advisory businesses with respect to the management of a portfolio of assets. The second threshold defined investment advisers as small entities if the adviser solely, or in addition to managing assets of $50 million or less, rendered other advisory services, and the assets relating to its advisory business did not exceed $50,000 in value as of the most recent fiscal year end. As a result of this second threshold, approximately 55% of investment advisers were deemed small. 37 The Commission originally selected this threshold because it reflected approximately the median value of advisers’ business assets at the time. 38 35 See 1981 Proposing Release, supra footnote 23, and 1982 Adopting Release, supra footnote 8. 36 1981 Proposing Release, supra footnote 23, at section II.F. 37 1982 Adopting Release, supra footnote 8. 38 See 1997 Proposing Release, supra footnote 33, at n.57. 15 Conformed to Federal Register version b. 1998 Amendments The Commission revised rule 0-7 in 1998 so that an investment adviser would be considered a small entity if: (i) neither the investment adviser, nor any investment adviser it has a control relationship with, has $25 million or more of RAUM, and (ii) neither the investment adviser, nor any person (other than a natural person) in a control relationship with the investment adviser, has $5 million or more of total assets. 39 The threshold was adjusted down from $50 million to $25 million in order to align the definition of “small entity” with the assets under management (“AUM”) threshold that had been enacted under the National Securities Markets Improvement Act of 1996 (“NSMIA”), which allocated regulatory responsibility for investment advisers with less than $25 million in AUM to the states and generally prohibited their registration with the Commission. 40 The Commission, referencing Congressional reports, stated that NSMIA permitted states to assume a primary role with respect to investment advisers that were smaller local businesses, while the Commission would be focused on larger investment advisers most likely to be engaged in interstate commerce, and amended the definitions of “small business” and “small organization” accordingly. 41 Although the Dodd-Frank Act in 2010 (DoddFrank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. 111-203, 124 Stat. 1376 (2010) (the “Dodd-Frank Act”)) effectively raised the minimum registration threshold for investment advisers to $100 million, the RAUM Threshold was not increased at that time and, as a result, the number of small entities significantly decreased. 39 See 1998 Adopting Release, supra footnote 9, at section II.B. 40 See id. at section II.B. 41 See 1998 Adopting Release, supra footnote 9, at n.47 and accompanying text. 16 Conformed to Federal Register version The “control relationship” prong was designed to take into account SBA size standards in determining whether to consider an investment adviser as “small.” 42 As stated above, the SBA size standards indicate that multiple entities that have substantially identical business or economic interests may be treated as a single entity, 43 and under the RFA, a small organization should be “independently owned and operated.” 44 In line with these considerations, the Commission stated that an investment adviser in a control relationship with a different large financial services firm typically benefits from the financial and technical resources that the larger firm may bring to bear, and the larger firm may handle the administrative and compliance needs of the affiliated investment adviser using resources that would not be included in the calculation as to whether an investment adviser is a “small business” or “small organization” under rule 0-7 if only the investment adviser’s financial resources were considered. 45 The “control relationship” prong thus prevents an investment adviser from being considered “small” if it is in a control relationship with (i) another investment adviser that has $25 million or more RAUM or (ii) any person (other than a natural person) with total assets of $5 million or more on the last day of the most recent fiscal year. 46 The 1998 amendments also replaced the “business assets” test with a more simplified formulation, instead measuring “total assets,” changing the threshold to $5 million, and extending the test to all investment advisers. 47 42 See id. at section I; see also supra footnotes 6 and 28 (discussing elements of the SBA size standards set forth in 13 CFR 121). 43 13 CFR 121.103(f). 44 See 5 U.S.C. 601(4). 45 1997 Proposing Release, supra footnote 33, at section I.B. 46 See rule 0-7(a)(3). 47 See 1998 Adopting Release, supra footnote 9, at section II.B. 17 Conformed to Federal Register version B. Overview of the Proposal We are proposing to amend the definitions of a “small entity” under the RFA for investment companies and investment advisers by raising the asset thresholds for both definitions. The proposal would: • Amend rule 0-10 to: (i) increase the net asset threshold for investment companies from $50 million to $10 billion; and (ii) refer, for purposes of aggregating the net assets of related funds, to a “family of investment companies” as that term is used in Item B.5 of Form N-CEN rather than to a “group of related investment companies” as used in the current rule; 48 • Amend rule 0-7 to increase the RAUM Threshold below which an investment adviser is considered to be a “small entity” from $25 million to $1 billion and to conform the assets under management threshold in the Control Relationship Threshold with the revisions made to the RAUM Threshold; • Request comment on whether to amend the Total Assets Threshold, as well as the total assets threshold contained in the Control Relationship Threshold, in rule 0-7; • Amend Form ADV to revise the instructions and Item 12 of Part 1A of Form ADV, including through making conforming changes; and • Amend rule 0-10 and rule 0-7 to allow the Commission to make subsequent inflation adjustments to the asset thresholds by order every 10 years in accordance with the inflation adjustment mechanism set forth in section II.C below (the “Inflation Adjustment Mechanism”). 48 Unless stated otherwise, the use of “fund family” or “fund families” in this release has the same meaning as “family of investment companies.” 18 Conformed to Federal Register version The proposal is designed to 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, consistent with the RFA. The proposal would help better tailor the Commission’s analyses of the specific regulatory challenges faced by small entities by expanding the scope of the analyses that the Commission conducts under the RFA to include investment advisers and investment companies that should more appropriately be deemed small entities. These analyses would, in turn, better inform the Commission of the regulatory impacts faced by small entities so that it may consider adapting its rulemaking accordingly. The Small Entity Rules currently define small entities by reference to assets under management and net assets for investment advisers and investment companies, respectively. There has been substantial growth in assets under management and net assets over the decades since these thresholds were set. To this end, and as discussed in more detail below, the proposal is designed to capture the types and numbers of investment advisers and investment companies that the Commission now considers to be “small” in light of this growth. 49 Amending the definitions would help ensure the Commission’s regulatory flexibility analyses capture a more meaningful population of “small entities” given asset growth over the past decades and, in turn, provide a clearer opportunity for public comment on the Commission’s regulatory analyses with respect to this population. 49 See infra sections II.A and II.B (discussing the Commission’s reasoning for increasing the asset-based thresholds for investment companies and investment advisers, respectively). 19 Conformed to Federal Register version II. DISCUSSION A. Proposed Amendments to Rule 0-10 of the Investment Company Act 1. Raising the Net Asset Threshold The proposal would amend paragraph (a) of rule 0-10 to increase the net asset threshold from $50 million to $10 billion and, as discussed in more detail in section II.C below, establish a mechanism to inflation-adjust this figure every ten years. The proposed increase accounts for the overall growth in the investment company industry since the $50 million threshold was originally set in 1982. In 1982, investment companies held $296.7 billion in net assets among 857 funds. 50 By the adoption of the 1998 amendments this had grown to $5.7 trillion among 7,829 funds, 51 with holdings of $41.6 trillion among 13,630 funds by 2024. 52 This growth in assets is attributable at least in part to overall economic growth leading to rising investment prices and the effects of inflation, as well as increased investor demand due to factors such as expansion of defined contribution retirement plans and easier access to investment services. One effect of this growth is that in 1982, 62.4% of investment companies were deemed “small entities,” 53 by 1998 that had dropped to 8.7%, 54 and by 2024, the share of investment companies 50 Investment Company Institute, 2025 Investment Company Fact Book (2025), at Data Tables, available at https://www.icifactbook.org/25-fb-data-tables.html (sum of Tables 1, 9, 12). These figures do not include BDCs, as data regarding them is not readily available from this time. 51 Id. 52 The 2024 estimates are based on data reported in response to Items B.6, C.19, and F.11 on Form N-CEN as of Dec. 31, 2024. 53 1982 Adopting Release, supra footnote 8. 54 Deregistration of Certain Registered Investment Companies, Investment Company Act Release No. 23588 (Dec. 4, 1998) [63 FR 69236 (Dec. 16, 1998)] (339 out of approximately 3,900 funds are “small entities”). 20 Conformed to Federal Register version deemed “small entities” had fallen to 0.6%. 55 Raising the net asset threshold in rule 0-10 to reflect growth in the investment company industry over the past decades would improve the utility of RFA analyses by more closely reflecting the population of funds that does not have the same competitive advantages as larger fund groups (for instance, due to economies of scale when these larger groups perform certain compliance and other operational functions in-house). It also would more closely reflect the population of funds that does not have the same negotiating power as larger fund groups when retaining service providers to perform compliance and operational functions. As discussed above, the Commission established the existing $50 million threshold in 1982 based on an analysis of adjusted expense ratios for a random sample of 500 investment companies. The Commission’s approach at the time reflected a belief that funds that bear a higher level of expenses as a proportion of their net assets would be less able to bear regulatory costs relative to their peers with lower expense ratios. Taking into account the substantial changes in the fund industry since that time—including a high degree of concentration of assets in the largest fund complexes, 56 a greater differentiation of fund strategies (with different expense ratios that may reflect factors other than the fund’s size), and the trend toward 55 85 small entities / 13,630 total registered investment companies and BDCs = 0.6%. The number of small entities is based on Commission staff estimates of approximately 32 small open-end funds (including 4 exchange-traded funds), 38 small closed-end funds, 2 small UITs, and 13 small business development (together, 32 + 38 + 2 + 13 equals 85 small entities). This estimate is derived from an analysis of data obtained from Morningstar Direct and data reported to the Commission (e.g., on Forms N-PORT, N-CSR, 10-Q, and 10-K) for the fourth quarter of 2024. See also supra footnote 52. 56 In 1985 the top 10 fund complexes held 54% of total mutual fund and ETF assets, but by 2024 the top 10 complexes held 71% of these total assets. Investment Company Fact Book (2002), available at https://www.ici.org/system/files/attachments/2002_factbook.pdf; Investment Company Fact Book (2025), available at https://www.ici.org/system/files/2025-05/2025-factbook.pdf. 21 Conformed to Federal Register version decreasing expense ratios across open-end funds generally 57—the approach taken in 1982 may no longer be appropriate to set a small entity threshold. 58 In determining how to calibrate the new proposed threshold, the Commission considered the distribution of assets across individual funds and fund families with the goal of ensuring that the proportion of funds that may face greater challenges in complying with Commission regulations due to their size be included in the small entity definition. Specifically, the Commission analyzed data reported on Form N-CEN to sort families of investment companies into percentiles according to their cumulative average total net assets. The Commission further analyzed this data to determine the percentage of individual funds and the percentage of average total net assets represented by each percentile. Table 1 below sets out the percentage of fund families, the percentage of individual funds, and the percentage of cumulative average total net assets that would be deemed small entities if the Commission were to set the threshold at the top end of each percentile. Table 1 - Distribution of Assets Across Funds and Fund Families 59 Percentile of fund families1 at or below threshold Net Asset Threshold % of individual funds2 in % of fund assets3 in fund families at or below fund families at or below threshold threshold 10th $23.7 million 0.87% 0.0016% th $68.4 million 1.84% 0.01% 20 57 The average expense ratio for U.S. open-end funds is less than half of what it was two decades ago due to a combination of inflows into low-cost funds (with some index mutual funds and ETFs having fees that are close to zero), outflows from higher-cost funds, fee cuts, and relative underperformance by more-expensive funds. See Morningstar, “Fund Fees Are Still Declining, But Not as Quickly as They Once Were,” May 28, 2025, available at https://www.morningstar.com/business/insights/blog/funds/us-fund-fee-study. 58 In light of these dynamics, that a fund’s expense ratio is relatively high would not necessarily reflect that the fund is relatively small, but may be more attributable to the fund’s strategy, perceived skill of the fund’s investment adviser or management, or other factors unrelated to the fund’s size. 59 Based on data reported on Form N-CEN through Jan. 21, 2025. 22 Conformed to Federal Register version Percentile of fund families1 at or below threshold Net Asset Threshold % of individual funds2 in % of fund assets3 in fund families at or below fund families at or below threshold threshold 30th $150.1 million 2.92% 0.03% 40th $319.6 million 4.28% 0.08% 50th $757.7 million 6.03% 0.18% 60th $1.69 billion 9.16% 0.43% 70th $3.54 billion 13.99% 0.95% th $10.04 billion 22.91% 2.13% th $43.47 billion 37.87% 6.99% $9,450.72 billion 100.00% 100.00% 80 90 th 100 Notes: 1. For purposes of these data, a fund family includes each fund that indicated on Form N-CEN that it is part of a family of investment companies. For a fund that did not indicate on Form N-CEN that it was part of a family of investment companies, it is included in this column as a separate fund family consisting solely of that fund. 2. “Fund” as used here refers to a registered investment company or business development company, including a separate series thereof. 3. As this table is based on Form N-CEN data, it does not include asset data for entities that do not report on Form N-CEN. The table does not include the data of investment companies exempt from registration, such as employees’ securities companies. It also does not include the assets of business development companies, which do not file Form N-CEN. Rule 0-10 applies to all investment companies; the vast majority of investment company assets are reflected in investment companies that report on Form N-CEN. Taken as a whole, registered investment companies have a total of approximately $41.6 trillion in net assets as of December 2024. As evidenced by Table 1, the assets of the investment company industry are heavily concentrated at the largest fund families. 60 For example, the Commission estimates that, as of December 2024, fund families above the 80th percentile in terms of aggregate average total net assets accounted for 97.9% of total net assets held by funds (as fund families at or below the 80th percentile threshold accounted for only 2.13% of fund assets). Similarly, as of December 2024, fund families above the 80th percentile accounted for 60 The SBA considers economic characteristics composing the structure of an industry such as degree of competition, average firm size, start-up costs and entry barriers, and distribution of firms by size in establishing size standards. See 13 CFR 121.102. We have focused our analysis on the distribution of firms by size as that is the metric for which we have the best available data. 23 Conformed to Federal Register version approximately 77% of individual funds (as the fund families at or below the 80th percentile threshold included 22.91% of individual funds). This reflects the fact that that the largest fund families not only manage the large majority of assets in the industry, but these large fund families also account for a majority of the individual funds. While the Commission seeks to ensure that funds and fund groups that may face greater challenges with regulatory compliance due to their size be deemed small entities, we are also mindful that setting the threshold too high has the potential to be counterproductive and to undermine the purpose of the Commission’s RFA analyses. A higher threshold would result in a larger pool of small entities and therefore would increase the number of small entities needed to be affected by a rule for the rule to “have a significant economic impact on a substantial number of small entities,” which could lead to fewer RFA analyses being performed. 61 Accordingly, the Commission’s proposed threshold is meant to identify a level below which a meaningful proportion of funds would be deemed small entities, but above which the size of, and concentration of assets in, fund families increases to such an extent that treating individual funds within those families as small entities would be counterproductive. Based on analysis of the distribution of data in Table 1, we are proposing a “small entity” definition that corresponds closely to the 80th percentile threshold of $10.04 billion, which we have rounded for convenience in the proposed rule. The proposed $10 billion threshold would 61 See 5 U.S.C. 605(b); see also, e.g., 1982 Adopting Release, supra footnote 8, at n.41 and accompanying text (stating, in the context of the AUM threshold for investment advisers, “the bigger the class, the greater the number of entities within it that must be adversely affected by a particular rulemaking before it can be said that the rulemaking affects a ‘substantial’ number of the class”). Setting the threshold too high might also inadvertently lead to the Commission overlooking issues that concern the smallest entities when the Commission attempts to tailor its rules, and instead focusing primarily on issues of more general concern to the industry. Such an outcome might have the potential to perpetuate larger funds’ advantages in the market, to the detriment of the smaller funds that the RFA was designed to protect. See also discussion at infra footnote 87 and accompanying text. 24 Conformed to Federal Register version capture approximately 80% of fund families resulting in approximately 22.9% of individual funds holding approximately 2.13% of aggregate average total net assets being deemed small entities. While the proposed threshold would deem some relatively large individual funds “small” for purposes of the RFA, such an outcome is consistent with the economies of scale rationale for aggregating funds within a family. A single large fund with no other related investment companies would bear similar regulatory costs to several smaller, related funds that collectively represent a similar level of net assets. We considered other approaches for defining investment companies that are small entities, including basing this definition on an entity’s gross receipts. 62 The SBA Table of Size Standards lists “Open End Investment Funds” with a given size standard of $40 million in gross receipts. 63 For the Commission there is a better suited standard to identify a “small entity” for the investment company industry. This is primarily because the Commission does not have or collect data for gross receipts of registered investment companies. Additionally, as discussed above, funds primarily generate revenue through capital appreciation and other investment returns rather than receipts from the sale of goods or services. Moreover, a fund’s investment returns may be attributable primarily to its particular investment strategy, meaning that two funds of identical size but pursuing different investment strategies may produce vastly different returns. 62 One petitioner suggested that the Commission define “small entity” for funds to capture any fund with a principal adviser to the fund that has fewer than 50 employees or annual revenue less than $25 million. See AMAC Report, supra footnote 10; see also infra footnote 89. As discussed below, we are not proposing an employee-based size standard for investment advisers, and the Commission does not collect revenue data from investment advisers. We are therefore not proposing to define small investment advisers according to these metrics. See infra section II.B.1. As we are not proposing this standard to define investment advisers that are small entities, it would not be appropriate to define funds that are small entities according to the size of their adviser under this standard. 63 13 CFR 121.201, at subsector 525. 25 Conformed to Federal Register version Accordingly, we do not believe that the gross receipts standard provides an appropriate means for the Commission to identify small investment companies for purposes of the RFA. 64 We request comment on all aspects of the proposed revisions to the net asset threshold, including the following items: 1. Is the proposed $10 billion threshold useful for identifying investment companies that are “small entities”? Should the Commission adopt a higher or lower threshold? If so, why? 2. Are there alternative metrics other than net assets that would be effective to evaluate if an investment company is a “small entity”? If so, what are they and why would they be more effective than net assets? Please clarify what data that are already reported to the Commission could be used in applying those metrics. If they do not involve data that currently are reported to the Commission, should the Commission require them to be reported, what would be the costs of such reporting, and how are such costs justified? 3. Should the Commission use the SBA’s standard for Open-End Investment Funds, which uses a threshold of $40 million in gross receipts? Should the threshold be based on another measure of revenue? If so, how should the Commission measure “gross receipts” (or other revenue measure) of an investment company or a family of investment companies for purposes of the threshold? 4. Are there alternative ways that the net asset threshold should be derived than the distribution-based analysis discussed above? For example, is the Commission’s 64 See supra section I.A.2.a. 26 Conformed to Federal Register version expense ratio approach from 1982 a more appropriate way of setting the small entity threshold? If so, why? 5. Should the Commission consider a fund a “small entity” if its principal adviser is a “small entity” under rule 0-7? What about a sub-adviser that is a “small entity”? If so, why? 6. Should the Commission adjust the existing net asset threshold for inflation rather than setting a new threshold based on an analysis of the distribution of funds and fund assets since the threshold was set in 1982, as discussed above? If so, should the Commission measure the inflation adjustment from the time of the threshold’s original adoption in 1982 or from the most recent amendments to the rule in 1998? If the Commission adjusted the existing threshold for inflation, is there a price index, such as the Personal Consumption Expenditures Chain-Type Price Index, the Consumer Price Index for All Urban Consumers, the Producer Price Index, or the GDP Price Deflator, that would be best suited for this adjustment? 65 Would using a securities market index such as the S&P 500 or the NYSE Composite Index, which is not based on inflation, be a better way to adjust the threshold that was set in 1982? Please supply explanations and reasoning. 2. Group Definition Amendments We are proposing amendments to rule 0-10 to replace the term “group of related investment companies” with “family of investment companies,” as that term is used in Item B.5 of Form N-CEN. This change would enable the Commission to rely on information that is 65 See infra footnote 126. 27 Conformed to Federal Register version already reported on Form N-CEN to identify small entities for purposes of RFA analyses and to more efficiently consider whether future adjustments to the net asset threshold are warranted. When the Commission amended rule 0-10 to aggregate net assets across groups of related investment companies, it defined the concept of a “group of related investment companies” in rule 0-10. 66 The Commission did not at that time adopt any corresponding disclosure requirements for a fund to specify whether it was part of a group of related investment companies. To date, the Commission still does not collect data that specifically identifies groups of related investment companies and their constituent funds. Instead, identifying groups of related investment companies requires a manual process (for example, assessing whether funds hold themselves out as related companies) to determine the number of small entities for purposes of conducting RFA analyses. 67 We propose to replace the term “group of related investment companies” in rule 0-10 with “family of investment companies” as that term is used in Item B.5 of Form N-CEN. 68 That item requires investment companies to report whether they are part of a “family of investment companies” and, if so, to disclose the full name of the family of investment companies. The Commission has collected this information from funds since 1985 and is experienced with 66 See supra footnotes 30-32 and accompanying text; see also 1998 Adopting Release, supra footnote 9. 67 The absence of specific data tailored to this purpose would also complicate setting a new net asset threshold based on the existing “group” definition. Using the “family of investment companies” definition from Form N-CEN has facilitated the approach to considering the new threshold for rule 0-10 in this proposal by incorporating data that funds report themselves. 68 Proposed rule 0-10(a)-(b). 28 Conformed to Federal Register version analyzing this and other data collected on Form N-CEN. 69 The definition of “family of investment companies” serves a substantially similar purpose to the definition of “group of related investment companies” in seeking to group together funds that hold themselves out to investors as related (the “holding out prong”) and that share an investment adviser or key service provider (an administrator for a “group of related investment companies” or underwriter for a “family of investment companies”). For comparison, the table below provides the existing definition of “group of related investment companies” from rule 010 alongside the existing definition of “family of investment companies” from Form N-CEN: 69 See Semi-Annual Report Form for Registered Investment Companies; Temporary Suspension of Quarterly Reporting Obligations of Certain Registered Investment Companies Pending Receipt of Comments on Proposed Final Action, Investment Company Act Release No. 14299 (Jan. 4, 1985) [50 FR 1442 (Jan. 11, 1985)] (“N-SAR Release”) (this disclosure was originally part of Form N-SAR before that form was replaced by Form N-CEN). 29 Conformed to Federal Register version Table 2 “Group of Related Investment Companies” (a) . . . (1) In the case of a management company, group of related investment companies means two or more management companies (including series thereof) that: “Family of Investment Companies” “Family of investment companies” means, except for insurance company separate accounts, any two or more registered investment companies that: (i) share the same investment adviser or principal underwriter; and (i) Hold themselves out to investors as related companies for purposes of investment and investor services; and (ii) Either: (A) Have a common investment adviser or have investment advisers that are affiliated persons of each other; or (B) Have a common administrator (ii) hold themselves out to investors as related companies for purposes of investment and investor services. Insurance company separate accounts that may not hold themselves out to investors as related companies (products) for purposes of investment and investor services should consider themselves part of the same family if the operational or accounting or control systems under which these entities function are substantially similar. (2) In the case of a unit investment trust, the term group of related investment companies shall mean two or more unit investment trusts (including series thereof) that have a common sponsor. (b) Special rule for insurance company separate accounts. In determining whether an insurance company separate account is a small business or small entity pursuant to paragraph (a) of this section, the assets of the separate account shall be cumulated with the assets of the general account and all other separate accounts of the insurance company. For management companies, both definitions require as one element that the investment companies hold themselves out to investors as related to one another for purposes of investment and/or investor services. Both definitions also focus on a shared investment adviser or other key service provider. While the specific differences between the two definitions are likely to result in 30 Conformed to Federal Register version somewhat different outcomes in terms of which funds are or are not “small entities,” 70 the Commission nevertheless believes that the “family of investment companies” definition from Form N-CEN is an appropriate means of aggregating related funds for purposes of the small entity threshold. Indeed, the Commission has used the “family of investment companies” concept to group related funds in Form N-CEN (or a predecessor form) since 1985. 71 Moreover, utilizing the “family of investment companies” concept in the small entities context promotes consistency in our rules and avoids the need for the Commission to require new reporting from investment companies for the sole purpose of adjusting the small entity threshold and performing RFA analyses. While we believe that the existing “family of investment companies” concept is sufficient and appropriate for this use, there are specific differences from the “group of related investment companies” concept that may produce different outcomes at the margins. For example, the “family of investment companies” definition groups funds that have a common principal underwriter, whereas the “group of related investment companies” definition groups funds that have a common administrator. The “family of investment companies” definition groups funds that have a common investment adviser, whereas the “group of related investment companies” definition groups funds that have either a common investment adviser or investment advisers 70 Due to the absence of a reporting requirement relating to a fund’s “group of related investment companies,” as discussed supra at footnote 67 and accompanying text, performing a direct comparison of which funds would be small entities under a $10 billion threshold using the “group of related investment companies” definition versus which funds would be small entities using the “family of investment companies” definition, would require a significant amount of manual analysis. While the Commission has conducted this analysis in the past to calculate the number of small entities at the $50 million threshold, at the proposed $10 billion threshold the number of funds to manually analyze increases from a few hundred to several thousand, making performing the analysis impractical. 71 N-SAR Release, supra footnote 69 (adopting Form N-SAR). 31 Conformed to Federal Register version that are affiliated persons of each other. These differences might lead to certain funds that are currently considered part of the same “group” not being part of the same “family” and vice versa, meaning that such funds would no longer be aggregated for purposes of the small entity threshold or would be newly aggregated for purposes of the small entity threshold, respectively. Any such differences, however, may be mitigated by other elements of the definition. For example, two funds whose advisers are merely affiliates of one another—and therefore do not meet the common adviser prong under the “family” definition—might share the same principal underwriter and would therefore continue to be aggregated for purposes of the small entity threshold, provided they also meet the holding out prong of the definition. Moreover, notwithstanding the differences between the two terms, funds that are part of the same “family of investment companies” are likely to experience similar economies of scale as those funds that are part of the same “group of related investment companies.” Examples of potential cost savings due to economies of scale might include complex-wide policies and procedures and recordkeeping systems, a shared chief compliance officer or board members, and one legal and compliance function that services the whole complex. We recognize the proposed changes to the definition would alter the treatment of UITs (including insurance company separate accounts). In current rule 0-10, UITs receive differential treatment from management investment companies. They are not subject to the holding out prong and are considered part of a group of related investment companies only if they share a common sponsor. 72 Under the proposed changes, UITs would become subject to the holding out prong because all investment companies generally follow the same test under the definition of 72 Rule 0-10(a)(2). 32 Conformed to Federal Register version “family of investment companies” in Form N-CEN. 73 Such a change is not expected to have a substantial effect on whether UITs are considered small entities because, based on staff experience, we understand that most UITs that have the same sponsor also have the same principal underwriter and hold themselves out as related. There are particular considerations for insurance company separate accounts that are registered as UITs. In current rule 0-10, an insurance company’s separate account is aggregated with the general account and all other separate accounts to determine whether the individual separate account is a small entity. 74 Under the proposed changes, however, the general account would no longer be considered in determining whether the family of investment companies is above or below the threshold. This approach is consistent with how the threshold applies to other types of investment companies because non-investment companies are generally excluded when assessing whether a family is above or below the threshold. For example, under both current rule 0-10 and under the proposed changes, a group of related investment companies or a family of investment companies, respectively, would not include any private funds (which are excluded from the Investment Company Act’s definition of “investment company”). In addition to differences in approach involving aggregation among the general account and separate accounts, the proposed approach may affect the extent to which separate accounts are aggregated to determine whether individual separate accounts are small entities. Under the current approach, the assets of the separate account are cumulated with the assets of all other separate accounts of the insurance company. As discussed when the family of investment companies definition was adopted (and as would be the case if we were to adopt the proposed 73 See Instruction to Item B.5 of Form N-CEN. 74 Rule 0-10(b). 33 Conformed to Federal Register version family of investment companies approach in the investment company small entity definition), insurance company separate accounts that may not hold themselves out to investors as related companies would have their assets aggregated with each other only if the operational or accounting or control systems under which those entities function are substantially similar. 75 We do not expect this change would result in significant differences in the extent to which insurance company separate account assets are aggregated because, in the staff’s experience, insurance company separate accounts tend to function under substantially similar operational or accounting or control systems. The Commission has previously used the data reported in response to Item B.5 of Form N-CEN, together with other data reported on Form N-CEN, to estimate the number of “groups of related investment companies” that would or would not exceed a particular threshold, such as in the case of staggered compliance dates. 76 By amending rule 0-10 to refer to the term already used in Form N-CEN, the Commission could leverage existing data in this and future rulemakings and avoid any added burden of requiring new or different reporting from investment companies solely for purposes of assessing and setting a new small entity threshold. 77 75 See N-SAR Release, supra footnote 69. 76 Regulation S-P: Privacy of Consumer Financial Information and Safeguarding Customer Information, Investment Company Act Release No. 35193 (May 16, 2024) [89 FR 47688 (June 3, 2024)], at Table 3; see also Investment Company Names, Investment Company Act Release No. 35000 (Sept. 20, 2023) [88 FR 70436 (Oct. 11, 2023)]. 77 We also considered amending Form N-CEN to require investment companies to report whether they are part of a group of related investment companies as that term is currently defined in rule 0-10. We determined that such a change would not be justified by the added burden of: 1) increased reporting obligations on Form N-CEN; and 2) requiring funds to assess and report their affiliations using two distinct definitions within the same form. 34 Conformed to Federal Register version We request comment on all aspects of the change to how the Commission proposes to aggregate funds under rule 0-10, including the following items: 7. Would the “family of investment companies” definition in Form N-CEN be an appropriate way of grouping investment companies for purposes of the small entity threshold? If not, why not? 8. Should the Commission make any changes to the definition of “family of investment companies” in Form N-CEN itself? For example, should that definition group together funds that meet the holding out prong of the definition but whose advisers are only affiliates of one another, as is currently the case under the “group of related investment companies” definition? Should the definition continue to require that funds hold themselves out and share a service provider or would the definition be more appropriate for identifying small entities without this holding out prong or if it required funds to hold themselves out or share a service provider? Please supply explanations and reasoning. 9. Should the Commission aggregate funds into groups or families in another manner? If so, how? Should the Commission instead eliminate the concept of “groups” or “families” altogether and look only to individual funds for purposes of assessing whether the fund is a small entity? If so, why? 10. Would the proposed changes to the treatment of UITs be appropriate for the small entity definition and if not, why not? How common is it for UITs that have the same sponsor to also have the same principal underwriter and hold themselves out as related? 35 Conformed to Federal Register version 11. Would the proposed changes to the treatment of insurance company separate accounts be appropriate for the small entity definition and if not, why not? For example, should the Commission’s small entity assessment omit consideration of an insurance company’s general account, as would be the case under the proposed changes? Is the instruction relating to separate accounts in Form N-CEN sufficiently clear? Is it correct that insurance company separate accounts generally tend to function under substantially similar operational or accounting or control systems? 12. Should we maintain the current definition of a group of related investment companies and create a new disclosure requirement for this item (for instance, in Form N-CEN)? What would the advantages of such a disclosure be, as compared to using the data already available from Form N-CEN? Or should we maintain the definition of a group of related investment companies and use it in place of “family of investment companies” in Form N-CEN? B. Proposed Amendments to Rule 0-7 of the Advisers Act 1. The RAUM Threshold The proposal would amend paragraph (a)(1) of rule 0-7 under the Advisers Act to raise the RAUM Threshold to $1 billion from $25 million and, as discussed in more detail in section II.C below, establish a mechanism to inflation-adjust this figure every ten years. 78 As discussed above, the current RAUM Threshold was adopted in the 1998 amendments to align the “small entity” definition applicable to advisers for RFA purposes with the $25 million AUM minimum 78 Proposed rule 0-7(a)(1) under the Advisers Act. 36 Conformed to Federal Register version threshold for adviser registration that had been enacted under NSMIA in 1996. 79 As a result, nearly all SEC-registered investment advisers have been excluded from treatment as a “small entity” in the Commission’s RFA analyses. Because the current RAUM Threshold was aligned with the minimum threshold for adviser registration, RFA analyses in our rulemakings have not considered the substantial majority of advisers that are subject to registration under the Advisers Act and the full application of the Commission’s rules thereunder. The growth of the investment management industry in assets under management has over time also reduced the number of advisers that are deemed to be “small entities.” According to Form ADV reporting, by 2025, only 451 of the total 15,909 SEC-registered investment advisers (approximately 3% of registered investment advisers) were considered to be “small entities” for purposes of the RFA, 80 down from approximately 75% immediately before and 20% immediately after the 1998 amendments. 81 79 Consistent with this alignment, current paragraph (a)(1) also provides that the RAUM Threshold will increase in tandem with any increase to the minimum threshold for adviser registration that the Commission makes by rule. See 1998 Adopting Release, supra footnote 9, at n.48 (explaining the addition of “or such higher amount as the Commission may by rule deem appropriate under Section 203A(a)(1)(A) of the Act” to rule 0-7(a)(1)). Although the Dodd-Frank Act in 2010 effectively raised the minimum registration threshold for advisers from NSMIA’s $25 million to $100 million, the RAUM Threshold was not increased. The proposal would revise paragraph (a)(1) to remove “or such higher amount as the Commission may by rule deem appropriate under Section 203A(a)(1)(A) of the Act (15 U.S.C. 80b3a(a)(1)(A)” because the RAUM Threshold, as proposed, would exceed and thus not align with the minimum threshold for adviser registration. 80 Because exempt reporting advisers are not required to report on Form ADV whether they qualify as “small entities,” the provided figures in this sentence are limited to registered investment advisers. 81 See 1997 Proposing Release, supra footnote 33, at n.59 and accompanying text (noting that up to 17,000 of approximately 22,500 total registered investment advisers met the then-rule’s definition of “small entity” and that the Commission would lose regulatory responsibility for an estimated 16,000 of these “small” advisers as a result of NSMIA). Following the deregistration of advisers no longer eligible to register as a result of NSMIA, the Commission estimated that approximately 1,500 of 7,600 registered investment advisers (approximately 20%) would be treated as small entities. See 1998 Adopting Release, supra footnote 9, at n.52 and accompanying text. 37 Conformed to Federal Register version The proposed amendments would increase the total number of investment advisers deemed to be “small entities.” The Commission estimates that approximately 15,850 of the total 21,650 investment advisers, or approximately 75% of advisers, 82 have RAUM below the proposed RAUM Threshold. Taken as a whole, advisers manage a total of about $152.9 trillion in RAUM, with a mean of approximately $7 billion of RAUM per adviser. However, the distribution of RAUM across all advisers is highly uneven, in part due to some advisers that report having zero or virtually zero RAUM, and more significantly because of the concentration of RAUM with the very largest advisers in the industry, as illustrated in Table 3 below. The Commission estimates that over 85% of total RAUM is managed by the largest advisers in the top 95th to 100th size percentile (i.e., by the top 5% of advisers in size). In light of this concentration, using the proposed $1 billion RAUM Threshold would still represent under 3% of total RAUM in the industry. In proposing the $1 billion RAUM Threshold, we considered the following distribution information on investment advisers, including RAUM values: 82 These estimates from Form ADV reporting data include only SEC-registered investment advisers and exempt reporting advisers. All of the Commission’s rules under the Advisers Act may be applicable to investment advisers that are registered (or required to be registered), and some of its rules may also apply to exempt reporting advisers (e.g., with respect to certain recordkeeping and reporting obligations, as well as insider trading and pay-to-play protections). Post-NSMIA, the Commission has generally not subjected state-registered advisers to its rules under the Advisers Act. See Rules Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers Act Release No. 1633 (May 15, 1997) [62 FR 28112 (May 22, 1997)], at nn.153-156 and accompanying text; see also Prohibition of Fraud by Advisers to Certain Pooled Investment Vehicles; Accredited Investors in Certain Private Investment Vehicles, Investment Advisers Act Release No. 2576 (Dec. 27, 2006) [72 FR 400 (Jan. 4, 2007)], at nn.14-19 and accompanying text. Additionally, because exempt reporting advisers are not required to provide RAUM information in Item 5 of Form ADV Part 1A, the data used for exempt reporting advisers reflects reported private fund gross asset values provided in Section 7.B. of Schedule D of Form ADV Part 1A. Private fund gross asset values are calculated in the same manner as RAUM in Item 5 in accordance with Form ADV instructions. See Instruction 6.e.(3) of Form ADV Part 1A (instructing filers to report as gross assets the assets of private funds that would be included in calculating RAUM under Item 5.F.). 38 Conformed to Federal Register version Table 3 Distribution of Investment Advisers and RAUM 83 Percentile of Advisers 10th 20th 25th 50th 55th 60th 65th 70th 75th 80th 85th 90th 95th 100th Individual RAUM of Adviser at Percentile 84 (Millions) Total Number of All Advisers at or below Percentile $33 $96 $125 $324 $399 $500 $632 $834 $1,130 $1,654 $2,612 $4,944 $14,040 $10,246,596 2,172 4,331 5,414 10,827 11,910 12,993 14,075 15,158 16,240 17,323 18,406 19,488 20,571 21,654 Total RAUM of All Advisers at or below Percentile (Millions) $21,482 $151,003 $271,591 $1,399,259 $1,788,139 $2,271,386 $2,879,161 $3,665,541 $4,711,141 $6,182,565 $8,342,641 $12,370,725 $21,290,612 $152,878,412 (Percent) 0.0% 0.1% 0.2% 0.9% 1.2% 1.5% 1.9% 2.4% 3.1% 4.0% 5.5% 8.1% 13.9% 100.0% In light of this significant concentration of RAUM with the very largest advisers, and although it would not result in the same proportion of advisers that were “small entities” as a result of the 1998 amendments, a $1 billion RAUM Threshold would strike an appropriate balance between the level of RAUM per “small” adviser and the proportion of total RAUM in the industry that would be captured by the new threshold. In addition, this proposed revision 83 This table shows percentiles for the distribution of investment advisers (including only registered investment advisers and exempt reporting advisers) by size based on their RAUM and the share of total RAUM managed by all advisers at or below the included distribution percentiles. This data reflects Form ADV reporting as of Dec. 31, 2024, and does not reflect the impact of either the total asset or control relationship prongs in the “small entity” definition. It does not include advisers (other than exempt reporting advisers) that are not registered or required to be registered with the Commission. 84 This refers to the RAUM of the investment adviser at the distribution percentile cutoff. 39 Conformed to Federal Register version would capture many advisers that are “not dominant in” their field, which is an element of the statutory definitions of small business and small organization in the RFA, due to the fact that such advisers individually manage much less RAUM relative to the largest advisers. 85 Although using $1 billion as the RAUM Threshold would classify as small a large proportion of investment advisers, this is a reasonable and appropriate result for purposes of our analyses under the RFA, in part due to the relative amount of assets managed by these advisers compared to the largest advisers, i.e., those dominant in their field. 86 We considered that the significant concentration of RAUM with the very largest advisers could suggest that an even higher RAUM Threshold than $1 billion should be used. However, a size standard threshold that is set too high could inadvertently cause the Commission’s attempts to tailor its rules for small entities to focus on issues of more general concern to the industry, instead of on issues that particularly impact smaller entities, which the RFA was designed to protect. 87 The Commission has received feedback suggesting alternatives to an asset-based approach to identifying small advisers. For example, the Commission received a petition to initiate rulemaking that recommends the “small entity” definition be amended to depend on 85 5 U.S.C. 601(3), 601(4), and 15 U.S.C. 632(a). The Control Relationship Threshold addresses the other element of these definitions; namely, that the entity “is independently owned and operated.” See id.; see also infra section II.B.3. 86 See also 1981 Proposing Release, supra footnote 23 (stating that an earlier small adviser standard that likewise encompassed a large proportion of investment advisers was reasonable and appropriate). 87 See supra footnote 61. 40 Conformed to Federal Register version whether an investment adviser has no more than a certain number of employees. 88 Additionally, the SEC Asset Management Advisory Committee (the “AMAC”) recommended that the “small entity” definition be amended to include advisers with fewer than a certain number of employees or with less than a certain amount of “annual revenue.” 89 The parties making these suggestions state that their alternatives better reflect the restricted resources and other constraints faced by small advisers and, in the case of employee-based standards, are reported on Form ADV and not affected by inflation and other fluctuations. Although we considered these suggestions, we are proposing to maintain a RAUM-based size standard. In developing size standards, the Commission has evaluated potential criteria both for their “capacity to differentiate small members of an industry from other members and [their ability to make] use of readily available information to derive [the] standards.” 90 The Commission has been able to utilize RAUM to appropriately differentiate between small and other advisers to identify a universe of entities that are not dominant in the field, a principal element of small entity status under the RFA. Further, the Commission has ready access to RAUM data for the types of advisers that are generally subject to our rules, not just those registered with us. 91 Also, using RAUM to distinguish between advisers is an approach that is broadly consistent with size standards generally under the Advisers Act and the rules thereunder, 88 IAA Petition, supra footnote 10 (suggesting that the Commission adopt a size standard of 100 employees or fewer). The Commission received comments in support of the IAA Petition’s attempt to assess the economic impact of regulations on small advisers more realistically and consider less onerous alternatives. These comments are available at https://www.sec.gov/comments/4-811/4-811.htm. 89 AMAC Report, supra footnote 10 (suggesting that the Commission adopt a size standard of fewer than 50 employees or annual revenue of less than $25 million). 90 1998 Adopting Release, supra footnote 9, at n.50; 1997 Proposing Release, supra footnote 33, at n.58; 1981 Proposing Release, supra footnote 23. 91 See supra footnote 82. 41 Conformed to Federal Register version as well as advisers’ existing reporting and compliance obligations. 92 Investment advisers also typically charge their clients fees as a percentage of their assets under management, such that their business as a practical matter generally scales with their assets under management. Furthermore, an increased RAUM-based size standard is an appropriate metric to reflect the growth of the size of the asset management industry, which the proposal is partly designed to address, because as the industry grows it would report more assets under management. 93 Accordingly, we are not proposing an employee-based or revenue-based size standard, but we request comment on employee-based, revenue-based, and other alternative size standards below (including whether the Commission should continue to use its own size standards for investment advisers rather than use the default size standards provided by the SBA). 94 The Commission has previously stated that an employee-based size standard was inappropriate for investment advisers because the then-recommended standard could have captured virtually all 92 Congress has repeatedly differentiated the regulations to which an adviser is subject using assets under management thresholds as size standards under the Advisers Act. See, e.g., section 203(m) (setting forth an assets under management threshold for the private fund adviser exemption from registration) and section 203A(a)(2) (setting forth an assets under management threshold for mid-sized advisers) of the Advisers Act. 93 See supra footnotes 79-81 and accompanying text. Appropriately increasing the RAUM-based size standard will also cause fewer “advisers that may manage higher AUM but still face similar resource constraints and other challenges that are characteristic of a small business” to be excluded from treatment as a small entity. IAA Petition, supra footnote 10. 94 See supra section I.A.3.a. (discussing SBA size standards for investment advisers). The category of industry in the SBA’s size standards under which an investment adviser would generally come appears to be “Finance and Insurance—Portfolio Management and Investment Advice,” where the existing SBA size standard is $47 million in “annual receipts” (which generally appears to be a measure of gross revenue or income). Notably, although the SBA uses an employee-based size standard for certain categories of industry, it does not do so with respect to this category. See 13 CFR 121.104, 121.201; see also Comment Letter from the SBA Office of Advocacy to FinCEN (May 15, 2024) (stating that FinCEN should use the SBA’s default size standards for investment advisers rather than the Commission’s size standards), available at https://advocacy.sba.gov/wp-content/uploads/2024/05/Comment-Letter-FInCEN-InvestmentAdvisors.pdf. 42 Conformed to Federal Register version advisers and because the Commission did not at the time receive information regarding employees from advisers. 95 Although the Commission now receives employee information from registered investment advisers on Form ADV, the Commission does not receive this information from exempt reporting advisers. In addition, an employee-based standard raises implementation challenges in appropriately addressing the use of service providers and outsourcing by investment advisers, which could distort the extent to which the number of an adviser’s own employees reflects its actual resources and size. 96 With regard to concerns raised in the IAA Petition about asset-based tests’ ability to respond to inflation, as discussed in more detail below, we agree that inflation can be among the factors that impact the adequacy of dollar-based size standards over time and are proposing to include a mechanism to regularly adjust the RAUM Threshold for inflation. 97 With respect to a revenue-based size standard, as was recommended by AMAC and as reflected in the SBA’s default size standards, the Commission does not collect information regarding advisers’ revenues and, because the fees and thus revenues of an adviser generally 95 See 1982 Adopting Release, supra footnote 89; 1981 Proposing Release, supra footnote 23. 96 As the market for advisory services has become more specialized, competitive and technology-intensive over time, investment advisers have increasingly engaged service providers and used outsourcing (including, e.g., using independent contractors that may perform advisory functions on the adviser’s behalf) to meet evolving market complexity and client demands in a cost-effective manner. See, e.g., The Race to Scalability 2020: Current Insights from a Decade of Advisor Research on Investment Management Trends, Flexshares (2020); Christopher Newman, Asset Managers Continue to Outsource Middle Office Functions, EisnerAmper (Oct. 21, 2020); Smart Outsourcing Can Be a Game-Changer for RIAs, ThinkAdvisor (Mar. 18, 2021). Additionally, consolidations in the advisory industry may have increased the likelihood that advisers that are part of a larger asset management group could use personnel who formally are employees of affiliates but who may not be taken into account by a purely employee-based size standard. See infra footnote 112 and accompanying text (discussing the types of benefits that derive from control relationship affiliations between an adviser and a larger firm and acknowledging that the RFA was not designed to confer benefits on entities with significant resources from their large business affiliates). 97 See also infra section II.C. 43 Conformed to Federal Register version scale directly with its assets under management, the proposal is generally consistent with the approach of the SBA size standards to measure the amount of business carried out by an entity. 98 We request comment on all aspects of the proposed amendments to the RAUM Threshold, including the following items: 13. If we maintain a RAUM-based size standard, should we use a threshold amount other than the proposed amount of $1 billion? Would a lesser or greater amount be more appropriate? For example, based on Form ADV reporting data (as shown in Table 3 above), using a $100 million threshold would cover approximately 20% of advisers, a $200 million threshold would cover approximately 35% of advisers, a $300 million threshold would cover approximately 50% of advisers, a $1.5 billion threshold would cover approximately 80% of advisers, a $2.5 billion threshold would cover approximately 85% of advisers, and a $5 billion threshold would cover approximately 90% of advisers. Alternatively, should the RAUM Threshold not be amended? 14. Should we use criteria instead of RAUM for our adviser size standards? For example, are there qualitative criteria that should be used (e.g., types of clients)? Would any recommended alternative criterion enable the Commission to meaningfully differentiate small advisers from non-small advisers, and could it be used in size standards derived from information that is readily available to the Commission with respect to all advisers (i.e., both registered investment advisers and exempt reporting advisers)? To the extent that necessary information related to the recommended criterion is not readily available to the Commission, please address whether the costs 98 See supra footnote 28 and section I.A.3.a. 44 Conformed to Federal Register version to advisers in reporting such information would be appropriate to enable the use of a small entity size standard based on that information. 15. Consistent with the IAA Petition and AMAC Report’s recommendation, should the Commission develop a form of employee-based size standard and, if so, how many employees should establish its threshold? 99 Should we, as suggested in the IAA Petition, use a standard of 100 or fewer employees or, as recommended in the AMAC Report, use a standard of fewer than 50 employees—or should we use another higher or lower number of employees? If the Commission were to determine its own numerical threshold for an employee-based size standard, what factors should it consider when determining that number? Would an employee-based size standard enable the Commission to more meaningfully differentiate small advisers from nonsmall advisers for purposes of the RFA? In order to enable any employee-based size standard for all advisers, should exempt reporting advisers also be required to provide employee information on Form ADV? Who should qualify as an employee for this purpose? For example, if a person were an employee of an affiliate, but worked for the adviser full or part-time and was paid by the affiliate, should that person be considered an employee of the adviser? Additionally, how should the use of service providers and outsourcing by advisers impact a potential employee-based size standard (and any related reporting)? To the extent that an employee-based size standard would be relevant in combination with a RAUM-based standard (or a 99 For discussion related to employee-based size standards, see supra footnotes 88-96 and accompanying text. 45 Conformed to Federal Register version revenue-based or other alternative size standard), how should it be meaningfully combined (e.g., as an additional standard or as a standard in the alternative)? 16. Do commenters agree that the Commission should continue to have its own size standards for investment advisers rather than use the default size standards provided by the SBA? Would using a $47 million “annual receipts” size standard enable the Commission to meaningfully differentiate small advisers from non-small advisers for RFA purposes, and would advisers be capable of reporting this information to the Commission pursuant to potential amendments to Form ADV? Alternatively, should the Commission consider another form of a revenue-based size standard (or another amount)? For example, should the Commission utilize the AMAC’s recommendation of annual revenue of less than $25 million? To the extent that a revenue-based size standard would be relevant in combination with another size standard, what is that size standard and how would it be meaningfully combined? 17. Should the RAUM Threshold be tied to adviser registration thresholds, as discussed above? For instance, should the RAUM Threshold be tied to the $100 million registration threshold for mid-sized advisers introduced by the Dodd-Frank Act in 2010, and if so, should the RAUM Threshold be further adjusted since 2010? 100 If the $100 million RAUM registration threshold from the Dodd-Frank Act were used and adjusted for inflation since its enactment in 2010, it would result in a RAUM Threshold of approximately $150 million and approximately 30% of advisers falling within the threshold. 100 See supra footnote 79. 46 Conformed to Federal Register version 18. Alternatively, should the RAUM Threshold (or other aspects of the small entity definition for investment advisers) be tied to the particular registration status of an investment adviser, such that, for instance, rulemakings that create distinct obligations between registered investment advisers, exempt reporting advisers and/or unregistered advisers would use distinct criteria to identify advisers that are small entities within the distinct classes of registration status? 19. Should the Commission consider using the same figure for investment advisers’ RAUM Threshold as for investment companies’ net asset threshold (or vice versa) as was the case when initially adopted in 1982? 101 Why or why not? 2. The Total Assets Threshold We are requesting comment on whether to amend the Total Assets Threshold. Currently this threshold excludes from the definition of small entity any adviser that has total assets of $5 million or more on the last day of its most recent fiscal year. 102 The Commission set this $5 million asset threshold in 1998 to in part to align with the $5 million total assets test used in the “small entity” definition in 17 CFR 240.0-10 (“Exchange Act rule 0-10”). 103 The Commission 101 See supra section II.A.1. 102 Rule 0-7(a)(2) under the Advisers Act. “Total assets” is defined in rule 0-7(b)(2) to mean total assets as shown on the balance sheet of the investment adviser (or of a “person” in a control relationship with the adviser in accordance with paragraph (a)(3) of rule 0-7). It includes business assets, such as leases and equipment, as well as other types of assets, such as cash and accounts receivable. See 1998 Adopting Release, supra footnote 9, at n.42. 103 Rule 0-10(a) under the Exchange Act; see 1998 Adopting Release, supra footnote 9, at n.51. Before the 1998 amendments, paragraph (a)(2) of rule 0-7 included a “business assets” test instead of a total assets test; and the threshold used for this test was approximately the median value for advisers’ business assets at the time. See 1997 Proposing Release, supra footnote 33, at n.57 (“The Commission originally selected [the business asset threshold] because it was approximately the median value of advisers’ business assets. . . . The median may have changed in recent years, but that figure remains significant inasmuch as more than half of all advisers apparently do not have assets exceeding it.”); 1982 Adopting Release, supra footnote 8. 47 Conformed to Federal Register version aligned the values in these “small entity” definitions under the Advisers Act and Exchange Act in view of financial industry affiliations between advisers and other large financial services firms to which the Exchange Act definition would apply. 104 The Total Assets Threshold enables the Commission to differentiate more meaningfully between small advisers and non-small advisers that may not have significant RAUM but do have significant assets related to a non-advisory line or component of their business. 105 The Total Assets Threshold also works in concert with the Control Relationship Threshold in capturing common types of advisory industry affiliations. The Commission, however, receives limited information regarding advisers’ total assets that would allow it to analyze with specificity the impact of potential changes to the Total Assets Threshold over the distribution of investment advisers. The Commission only receives information in Item 1.O. of Part 1A of Form ADV regarding investment advisers with $1 billion or more in total assets 106 as well as information in Item 12 from registered investment advisers with less than $25 million in RAUM regarding whether they have less than $5 million in total assets. 107 Accordingly, we are not proposing to 104 See 1998 Adopting Release, supra footnote 9, at n.51; see also 1997 Proposing Release, supra footnote 33 (“An adviser in a control relationship with a large broker-dealer or other large financial services firm typically benefits from the financial and technical resources of the large firm. The large firm may handle much of the administrative and compliance needs of its affiliated adviser using resources not reflected in the adviser’s client assets or business assets.”). In addition, the 1998 amendments relatedly added paragraph (a)(3) to rule 0-7, which, as discussed below, applies the Total Assets Threshold in paragraph (a)(2) to any “person” in a control relationship with the investment adviser. 105 The IAA Petition states that using an asset-based standard, including standards based on total firm balance sheet assets, does not accurately reflect regulatory burdens imposed on smaller advisers. See IAA Petition, supra footnote 10. As with the RAUM Threshold discussed above, asset-based metrics like the Total Assets Threshold are an effective and appropriate method to differentiate small members of the investment advisory industry from other members. See supra footnotes 90-93 and accompanying text. 106 According to Form ADV data, about 680 investment advisers (over 3% of all advisers) report having $1 billion or more in total assets. 107 See infra section II.B.4. As discussed below, we are proposing to amend Item 12 of Part 1A of Form ADV to conform to any amendments made to rule 0-7. 48 Conformed to Federal Register version modify the Total Assets Threshold at this time, but are requesting comment on possible changes to the threshold. Although we are broadly seeking comment on whether and, if so, how to update the Total Assets Threshold, we are proposing to include an Inflation Adjustment Mechanism to inflationadjust the Total Assets Threshold every ten years, rounded to the nearest multiple of $500,000, or 10% of the current Total Assets Threshold. We expect that in any final rule this mechanism would be calculated against and scale with the Total Assets Threshold ultimately used by the Commission. If an updated Total Assets Threshold were ultimately adopted, we would adjust the dollar amount to be rounded to the nearest multiple of 10% of such updated Total Assets Threshold (e.g., if the final Total Assets Threshold is updated to $10 million, then future inflation adjustments would be rounded to the nearest multiple of $1 million). We request comment on all aspects of the proposed Total Assets Threshold, including the following items: 20. Should the Total Assets Threshold remain $5 million? If the threshold should be increased, to what should it be increased, and why? If the threshold should be decreased, to what should it be decreased, and why? Should we look to a median or other value for investment advisers based on information provided to the Commission as a result of public comment? 21. Should the Total Assets Threshold continue to be aligned with the total asset threshold in Exchange Act rule 0-10(a)? If so, should we expressly tie the Total Assets Threshold to the total assets threshold in Exchange Act rule 0-10(a) by crossreferencing that rule in rule 0-7 under the Advisers Act? Are there other total asset 49 Conformed to Federal Register version thresholds under Commission regulations to which the Total Assets Threshold should be aligned? If so, what are they, and why? 22. Should the Total Assets Threshold be adjusted based on inflation or some other market growth metric? If so, which metric or index and from when should the threshold be adjusted, and why? For example, the Inflation Adjustment Mechanism as proposed to apply to the Total Assets Threshold utilizes the Personal Consumption Expenditures Chain-Type Price Index and compares it to 1998 prices. Applying that standard to the Total Assets Threshold itself would result in a new threshold value of approximately $10 million. 23. Should the Total Assets Threshold be adjusted to represent an increase proportionate to the proposed amendments to the RAUM Threshold by increasing the Total Assets Threshold by the same factor (x40, as proposed) that we are increasing the RAUM Threshold (e.g., $200 million)? Why or why not? 24. Should the Total Assets Threshold be eliminated from rule 0-7? Given that there are some investment advisers that register with the Commission but report to have zero or virtually zero RAUM, as well as that there are large advisers that may have insignificant RAUM but have significant assets from a non-advisory component of their business, would removing the total assets test diminish the Commission’s capacity to differentiate these types of advisers and small advisers for RFA purposes? If the total assets test were removed, what other size standards (e.g., employee or client-based) could be used to differentiate these advisers, and why should they be used? What existing sources of data does the Commission have to support the use of such other standards? If the Commission does not have existing sources of data, 50 Conformed to Federal Register version should the Commission require the reporting of such data, what would be the costs to registrants of such reporting, and how are the costs of such reporting justified? 25. In what ways should the Inflation Adjustment Mechanism be adjusted should the Commission adopt a different Total Assets Threshold from the current one? 3. The Control Relationship Threshold Currently, the Control Relationship Threshold uses an assets under management standard to establish the disqualifying size of affiliated advisers that is the same standard ($25 million) used in the RAUM Threshold. The proposal would amend paragraph (a)(3) of rule 0-7 under the Advisers Act to increase this assets under management threshold from $25 million to $1 billion.108 The proposal would also, as discussed in more detail in section II.C, include Inflation Adjustment Mechanisms for the assets under management and total assets aspects of the Control Relationship Threshold that are identical to those proposed for the RAUM and Total Assets Thresholds, respectively. 109 The proposed amendments are designed to conform this threshold to the proposed revisions to the RAUM Threshold and the inclusion of an Inflation Adjustment Mechanism in the Total Assets Threshold. 110 The Commission previously stated that “Congress did not intend 108 Proposed rule 0-7(a)(3) under the Advisers Act. The proposal would also revise paragraph (a)(3) to remove “(or such higher amount as the Commission may deem appropriate)” in line with the proposed removal of related language in paragraph (a)(1). See supra footnote 79 (discussing the proposal’s revision to paragraph (a)(1) to remove “or such higher amount as the Commission may by rule deem appropriate under Section 203A(a)(1)(A) of the Act (15 U.S.C. 80b-3a(a)(1)(A)”). 109 Proposed rule 0-7(c) under the Advisers Act. 110 The proposed amendments to the Control Relationship Threshold would continue to consider an adviser’s affiliates on an individual basis, unlike the proposed amendments applicable to investment companies, which would instead continue to consider the net assets of multiple related investment companies as 51 Conformed to Federal Register version to confer the benefit of any determination that an entity is small upon the affiliates of large businesses, because only those business and organizations that are ‘independently owned’ may qualify as small entities pursuant to the definitions contained in the RFA.” 111 As such, the Commission noted its belief “that it is appropriate . . . to preclude entities with significant economic or financial resources [from their large business affiliates] from obtaining potential regulatory benefits under the RFA.” 112 The proposed amendments to the Control Relationship Threshold would align its assets under management threshold to the RAUM Threshold that, as discussed above, more appropriately captures advisers that should be deemed “small entities” for purposes of our analyses under the RFA. Based on Form ADV reporting, the Commission estimates that updating the Control Relationship Threshold to reflect the increase of the RAUM Threshold from $25 million to $1 billion would result in approximately 1,225 investment advisers (or approximately 5.7% of all aggregated together. See supra section II.A.2. The proposed amendments would thus remain consistent with the Commission’s historically distinct approaches between identifying “small entity” investment advisers and “small entity” investment companies. Retaining this distinction as proposed would continue to be appropriate in light of the distinct operational and organizational structures of investment advisers and investment companies (for example, investment companies generally do not have any staff, unlike investment advisers, but instead rely on service providers for all of their operations, including regulatory compliance), as well as because of the distinct reporting information that the Commission receives with respect to investment advisers and investment companies. 111 1981 Proposing Release, supra footnote 23 (citing 5 U.S.C. 601(4) and 15 U.S.C. 632, which define as a small business or small organization an entity that “is independently owned and operated and is not dominant in its field”); see also 1997 Proposing Release, supra footnote 33. 112 See 1997 Proposing Release, supra footnote 33. A non-control affiliation with a large adviser or other person, or a control relationship with an adviser or other person that is itself a “small entity,” would not trigger exclusion under the Control Relationship Threshold. As noted above, per the Commission’s prior positions and staff observations, advisers that are in a control relationship with other large firms typically benefit from the financial and technical resources of the large firm in a manner that is not reflected in advisers’ own client or balance sheet assets. We continue to view this benefit as typically deriving from a control relationship rather than mere affiliation and, accordingly, believe that the RFA’s exclusion of businesses that benefit from large affiliates is appropriately applied to advisers that are in a control relationship with other large advisers (or other firms). 52 Conformed to Federal Register version advisers) being excluded from treatment as a “small entity.” As such, the Commission estimates that, as a result of the proposed amendments to the assets under management thresholds in paragraphs (a)(1) and (a)(3), approximately 14,620 of the total 21,650 investment advisers, or approximately 70% of all advisers, would meet the revised RAUM and Control Relationship Thresholds. This would be an appropriate result despite the increase in excluded advisers. As noted above, one aspect of the statutory definition of small business or small organization under the RFA is that the entity is “independently owned and operated.” 113 The continued application of a control relationship threshold (including as amended) would exclude advisers that may not have significant RAUM or total assets themselves but are in a control relationship with a large adviser (or other firm) and thus are not “independently owned and operated,” appropriately focusing the Commission’s analyses on those advisers that are small for purposes of the RFA. 114 We are not at this time proposing revisions to the Total Assets Threshold. Accordingly, we are not proposing to amend the total assets threshold in the Control Relationship Threshold, but are requesting comment on whether to revise the threshold. We request comment on all aspects of the proposed amendments to the Control Relationship Threshold, including the following items: 26. Should the assets under management threshold in the Control Relationship Threshold be increased to $1 billion as proposed? Should the threshold be tied to the RAUM Threshold as proposed? Should the total assets threshold in the Control Relationship Threshold be changed? If so, what should it be changed to, and why? Should the threshold be tied to the Total Assets Threshold? Or should we use a different assets 113 5 U.S.C. 601(3), 601(4), and 15 U.S.C. 632(a). 114 See supra footnotes 109-110 and accompanying text. 53 Conformed to Federal Register version under management threshold and total assets threshold for this purpose? Should the Control Relationship Threshold include alternative criteria other than assets under management and total assets, for example, if alternative criteria are used at adoption to replace or modify the current RAUM Threshold and/or Total Assets Threshold? 115 Should the Control Relationship Threshold be eliminated? 27. As discussed above, the Commission is considering whether to amend the Total Assets Threshold but is not proposing specific revisions to it at this time. Should the Commission incorporate any future amendments to the Total Assets Threshold into the Control Relationship Threshold? If the Commission modifies or eliminates the Total Assets Threshold in paragraph (a)(2) with respect to investment advisers, should it also do so or instead maintain the total assets threshold with respect to persons that are control affiliates in paragraph (a)(3)? Why or why not? 28. Does paragraph (a)(3)’s treatment of advisers affiliated with other advisers and persons that are not themselves “small entities” properly focus on control affiliations? Are there other relationships that more appropriately capture the types of affiliations the Control Relationship Threshold was designed to capture? If so, what are they, and why? Are there specific factors that would appropriately include as small entities those advisers that are substantially managed and resourced independently of any control affiliate? 116 If so, what are they, and why? Are they different from the types 115 See supra sections II.B.1 and II.B.2. 116 See IAA Petition, supra footnote 10 (“We would expect the Commission, as part of the notice and comment process, to seek input on all elements of the proposed definition, including what specific factors would appropriately include as small entities those advisers that are substantially managed and resourced independently of any control affiliate.”). 54 Conformed to Federal Register version of factors that may already be used to rebut the presumption of control arising from ownership? 29. Should the Control Relationship Threshold be amended to consider an adviser’s control affiliates on an aggregate rather than individual basis, similar to the historical and proposed approach for investment companies, notwithstanding the operational and organizational differences between investment advisers and investment companies? If so, why, and how should this aggregation of control affiliates function? For example, should an adviser be considered a “small entity” if it, collectively with other investment advisers that are its control affiliates, has less than a certain amount of RAUM (e.g., $1 billion)? 4. Form ADV Amendments The proposal would amend Form ADV to revise Instruction 17 of the General Instructions, 117 Item 12 of Part 1A of Form ADV, 118 and rule 203-3(b). 119 The proposed amendments to Form ADV are designed to reflect the proposed revisions to the RAUM Threshold and the Control Relationship Threshold. Instruction 17, pursuant to rule 203-3(b), currently provides a continuing hardship exemption from electronic filing requirements if a registered or registering investment adviser is a small business and can demonstrate that filing electronically would impose an undue hardship. 120 In line with the amendments to the definition of small entity, the proposed amendments to Instruction 17 would permit a continuing hardship 117 See proposed Form ADV General Instructions, Instruction 17. 118 See proposed Form ADV, Part 1A, Item 12. 119 See 17 CFR 275.203-3(b) (setting forth the conditions for an investment adviser to apply for a continuing hardship exemption). 120 See current Form ADV General Instructions, Instruction 17. 55 Conformed to Federal Register version exemption from electronic filing requirements for investment advisers which: (i) can demonstrate that filing electronically would impose an undue hardship, (ii) are required to answer Item 12 because they have less than $1 billion, instead of $25 million, in RAUM, and (iii) are able to respond “no” to each question in Item 12, which would continue to track the elements of the small entity definition and which determines whether registered or registering investment advisers meet the definition of “small business” or “small organization” under rule 07. 121 We are also proposing to remove the parenthetical “(because you have assets under management of less than $25 million)” from Instruction 17 because this language is implicit in Instruction 17’s requirement that an investment adviser be required to answer Item 12 and the threshold amount set forth in Instruction 17 would otherwise need to be updated periodically in conformity with rule 0-7 to remain valid. We are also proposing to revise the language of Instruction 17 and rule 203-3(b) to explicitly apply to an investment adviser who is either a “small business” or “small organization” in conformity with Item 12. The amendments to Item 12 would revise the RAUM threshold under which an investment adviser must complete Item 12 from $25 million to $1 billion, corresponding with the proposed amendments to the definitions of “small business” and “small organization” under rule 0-7. 122 They would also revise the thresholds set forth in Items 12.B.(1) and C.(1)—which collect informa [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A441fc16447dd6e29. Public record. Not legal advice.