Why the Definition of “Small Adviser” Deserves a Second Look
I saw what the Investment Adviser Association posted on LinkedIn about the definition of a “small adviser,” spent some time digging into it, and wanted to weigh in.
They are right to press this issue. The current framework does not reflect how the advisory industry actually operates, and that gap has real consequences in SEC rulemaking.
The Definition Is Broken
The SEC still defines a “small adviser” as one with less than $25 million in AUM. That threshold is decades old.
At this point, it captures almost none of the firms the SEC regulates. Advisers below that level are typically state-registered. SEC-registered advisers are, by design, above it.
So when the SEC conducts its Regulatory Flexibility Act analysis, it can say its rules do not materially impact small advisers. Under its own definition, that is technically correct.
In practice, it misses the entire category of firms that actually feel the burden.
I represent a number of advisers in the $150–300 million AUM range. On paper, that sounds substantial. In reality, these are small shops. Very small. Lean teams, limited budgets, and founders wearing multiple hats trying to build something sustainable while staying compliant. These are not institutions. These are, in many cases, mom-and-pop operations doing the best they can in a heavily regulated environment.
They do not exist in the SEC’s current definition of “small.” But they are exactly the firms the Regulatory Flexibility Act was meant to account for.
Why This Matters in Rulemaking
The Regulatory Flexibility Act is supposed to force agencies to assess the impact of rules on smaller firms and consider less burdensome alternatives.
But that obligation only kicks in if a rule affects a substantial number of “small entities.”
If the definition excludes most of the relevant firms, the analysis becomes perfunctory. The SEC can certify its way through rulemaking without meaningfully engaging with cost or scalability.
That shapes outcomes. Rules get written with large firms in mind. Smaller firms absorb those same requirements without the same resources.
The $1 Billion Proposal Is a Necessary Reset
The SEC’s proposal to raise the threshold to $1 billion in AUM is a significant step. It brings a large portion of SEC-registered advisers into the analysis.
That change would force the Commission to take a harder look at:
actual compliance costs
how those costs scale
whether alternatives should be considered
It aligns the analysis with the industry as it exists today.
AUM is not a perfect proxy for size, but the current threshold is not defensible. Moving to $1 billion is directionally right and long overdue.
The IAA Is Right to Push for Legislation
Even if the SEC finalizes this change, it does not settle the issue.
Definitions like this can be revisited. They can be narrowed or deprioritized depending on who is sitting at the Commission.
That is why the Small Entity Update Act matters. It would require the SEC to use a modernized definition and incorporate it into its rulemaking process in a consistent way.
That creates durability and accountability. It also gives courts a clearer standard when reviewing whether the SEC has done the analysis it is supposed to do.
This Has Real Market Implications
Regulatory costs do not hit evenly.
Larger firms absorb them more efficiently. Smaller firms feel them more directly. Over time, that dynamic influences consolidation, competition, and access to the market.
If the SEC does not account for that, it is still shaping outcomes. It is just doing so without acknowledging it.
Bottom Line
This is a fixable issue. The SEC has already signaled movement. Congress has a bill on the table. The industry is aligned.
The only real question is whether this gets locked in or left open to reversal. The definition of “small adviser” drives how regulatory impact is measured. Right now, it does not reflect reality. That is what needs to change.
