The Securities and Exchange Commission on Wednesday finalized a rule that raises the asset ceiling for investment advisers to qualify as small entities, from $25 million to $1 billion in regulatory assets under management. The change, first proposed in January, will pull roughly two-thirds of SEC-registered advisers into the group of firms the agency must consider when drafting new regulations.
The final version of Advisers Act Rule 0-7 goes further than the initial proposal by eliminating a second test that disqualified any adviser with $5 million or more in balance-sheet assets. SEC Chairman Paul S. Atkins said the update, the first in nearly three decades, is "an important step to eliminate unnecessary regulatory burdens and modernize our rulebook."
Why the small-entity label matters
The Regulatory Flexibility Act of 1980 requires federal agencies to analyze how proposed rules affect small businesses and to consider less burdensome alternatives when the impact is significant. Advisers that fall outside the SEC's definition of small are effectively invisible in that analysis. The old threshold, set in 1982 and last revised in 1998, counted an adviser as small only if it managed less than $25 million, held under $5 million in total assets, and was not under common control with a larger firm. That cutoff made sense when $25 million was also the minimum for SEC registration, but Congress has since raised the registration floor to $100 million.
According to the Investment Adviser Association's 2026 industry snapshot, there were a record 16,544 SEC-registered firms in 2025, but only 536, or about 3%, met the old small-entity definition. The new $1 billion threshold captures 67.4% of SEC-registered advisers—more than 10,500 firms. The IAA noted that "advisers with less than $1 billion in assets accounted for almost all of the new SEC registrations," with new registrants making up over a quarter of firms in that size range.
The SEC's adopting release estimates that 11,017 advisers will now need to answer the small-entity questions in Item 12 of Form ADV, including about 10,180 firms that do not answer them today. When including exempt reporting advisers, the $1 billion threshold covers about 75% of advisers, yet those firms hold less than 3% of total regulatory assets in the industry.
SEC Commissioner Mark Uyeda emphasized that the changes "do not alter any substantive requirement applicable to any firm." Instead, they provide a framework for the Commission to consider how regulations affect smaller entities, which "may be disproportionately affected when compared to significantly larger firms."
Industry feedback and adjustments
The proposal drew roughly 20 comment letters, with most supporting the modernization. Investor advocates, including Better Markets and the Public Investors Advocate Bar Association, warned the change could weaken investor protections, though the SEC said designating a firm as small does not reduce investor protection. The IAA, which had petitioned for the review, urged the SEC to eliminate the $5 million total-assets test or raise it to $10 million. The SEC chose to scrap the test, concluding that balance-sheet items like leases and equipment don't reflect the scale of an advisory business.
The agency also rejected a coalition that included the CFP Board and the Financial Planning Association, which had proposed using headcount as a size measure. The SEC argued an employee-based test would be skewed by advisers' heavy reliance on outsourcing. Some commenters had confused the small-entity threshold with the $100 million SEC registration minimum, but the SEC clarified it is not amending the registration threshold.
The change comes as Fidelity's $100 million custody floor forces 986 small RIAs to make decisions by June 2027, and as state mandates and plan complexity push small-business retirement plans into advisors' laps. The new definition may also influence how the SEC weighs the impact of future rules on the growing number of pooled employer plans.
