On January 7, the SEC proposed amendments to its rules defining which registered investment companies, investment advisers, and business development companies qualify as small entities for purposes of the federal Regulatory Flexibility Act (RFA). Specifically, these amendments would broaden the existing definitions so that many more investment funds and advisers would be deemed to be small entities.
Potential Impact on Important RFA Determinations
These expanded definitions could be highly relevant to SEC decisions about future regulatory actions it takes. In this regard, the RFA requires federal agencies — including the SEC — to conduct certain analyses, with the goal of minimizing the significant economic impact of federal rulemaking on small entities. It requires, for example, that the SEC analyze how any new rulemaking would affect small entities and consider alternatives, such as differing compliance or reporting requirements or timetables, or exempting small entities, wholly or in part, from the rule.
This expansion of the RFA applicability would seem especially significant now, in view of the numerous major regulatory initiatives currently underway at the SEC, many of which are intended to implement regulatory policies favored by the Trump administration, SEC Chairman Paul Atkins, and other current senior SEC officials. Such initiatives include review and revision of existing rules, as well as any new rules that the SEC may consider.
In this connection, the RFA also requires that federal agencies, including the SEC, conduct certain periodic reviews of how their prior rulemakings affect small entities. For example, on the same day (January 7) as it issued its proposal to amend its small entity definitions, the SEC also issued a notice of its review of the impact on small entities of certain significant rulemaking actions that the SEC took 10 years ago. Such 10-year reviews are among the RFA’s mandates.
Unless and until adopted in final form, the SEC’s proposed changes in its small entity definitions will not have any mandatory impact on the SEC’s RFA analysis in connection with any new SEC rulemaking or SEC review of any of its prior rulemakings. Nevertheless, the SEC’s proposed definitional changes reflect an already heightened concern about the impact of its regulations on small investment company complexes and advisers.
Overall Regulatory Context and Objectives
The proposal aims to help the SEC better balance the costs and benefits of its regulation of small investment advisers and fund complexes, which would directly further the important purposes of Executive Order 14219 (February 19, 2025), titled “Ensuring Lawful Governance and Implementing the President’s ‘Department of Government Efficiency’ Deregulatory Initiative.” That order targets, among other things, regulations that:
- Impose significant costs upon private parties that are not outweighed by public benefits; or
- Impose undue burdens on small business and impede private enterprise and entrepreneurship.
The SEC’s proposed small entity rule amendments also directly further purposes such as those described in Executive Order 14267 (April 9, 2025), titled “Reducing Anti-Competitive Regulatory Barriers,” which targets regulations that
- Create unnecessary barriers to entry for new market participants;
- Limit competition between competing entities or have the effect of limiting competition between competing entities; or
- Create or facilitate licensure or accreditation requirements that unduly limit competition.
Overview of Proposals’ Substance
The existing small entity definitions would be greatly expanded to include large numbers of investment funds and advisers that the small entity rules do not currently cover. For example, the SEC’s proposing release estimates that in 2024, only 0.6% (i.e., 85 of 13,630) of the total number of registered investment companies were considered small entities for RFA purposes. The release estimates this percentage would increase to 22.9%.
Similarly, the proposing release estimates that, while in 2025 only 3% of the total number of SEC-registered investment advisers were considered small entities for RFA purposes, the proposed amendments would increase that percentage to 75%.
Adoption of the proposed amendments would not have an immediate impact on the regulatory requirements applicable to any entity, however. For example, the amendments’ designation of an investment adviser as a small entity would not require or permit that adviser to withdraw from SEC registration, as the dollar threshold for investment adviser registration is specified by a provision in the Investment Advisers Act of 1940 that would not be changed by the amendments.
Takeaways
Investment companies, investment advisers, and business development companies may wish to submit comments on the proposed revisions to the SEC’s small entity definitions. The proposed revisions involve a number of complexities that may impact different registrants quite differently. Most fundamentally, larger fund complexes and investment advisers may find it difficult to understand why any less onerous regulation that the SEC may decide to apply to smaller entities should not apply to larger entities, as well. However, it may be possible to argue that point effectively only in the context of a specific SEC proposal to regulate small entities less rigorously; and the SEC has not yet made any such specific proposal.
In any event, the deadline for submitting comments on the proposed definitional revisions is March 13, 2026. The SEC also is inviting public comments on its above-mentioned reconsideration of the impact on small entities of certain significant 2016 rulemaking proceedings. The deadline for summitting comments on that is February 11, 2026.
More generally, regardless of when or if the SEC adopts any definitional amendments, it seems very possible that the SEC and its staff may be more receptive than in the past to smaller entities’ well-reasoned arguments for some types of flexible regulatory treatment. Accordingly, small entities — including those defined as such under the SEC’s proposal — should give serious consideration to making such arguments where they have merit.
