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Proposed Rule2026-00316

"Small Business" and "Small Organization" Definitions for Investment Companies and Investment Advisers for Purposes of the Regulatory Flexibility Act

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Published

January 12, 2026

Issuing agencies

Securities and Exchange Commission

Abstract

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 asset- based 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.

Full Text

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<title>Federal Register, Volume 91 Issue 7 (Monday, January 12, 2026)</title>
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[Federal Register Volume 91, Number 7 (Monday, January 12, 2026)]
[Proposed Rules]
[Pages 1107-1130]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-00316]

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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

``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.

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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 asset-
based 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

<bullet> Use the Commission's comment form (<a href="https://www.sec.gov/comments/s7-2026-01/small-entity-definition-amendments-investment-advisers-investment-companies">https://www.sec.gov/comments/s7-2026-01/small-entity-definition-amendments-investment-advisers-investment-companies</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#750700191058161a1818101b0106350610165b121a03"><span class="__cf_email__" data-cfemail="245651484109474b4949414a5057645741470a434b52">[email&#160;protected]</span></a>. Please include
File Number S7-2026-01 on the subject line.

Paper Comments

<bullet> Send paper comments to Vanessa A. Countryman, Secretary,
Securities

[[Page 1108]]

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 (<a href="https://www.sec.gov/comments/s7-2026-01/small-entity-definition-amendments-investment-advisers-investment-companies">https://www.sec.gov/comments/s7-2026-01/small-entity-definition-amendments-investment-advisers-investment-companies</a>). 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 <a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.
A summary of the proposal of not more than 100 words is posted on
the Commission's website (<a href="https://www.sec.gov/rules-regulations/2026/01/s7-2026-01">https://www.sec.gov/rules-regulations/2026/01/s7-2026-01</a>).

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, 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.

Table of Contents

I. Introduction
A. Background
1. The Regulatory Flexibility Act of 1980
2. Investment Company Size Standards
3. Investment Adviser Size Standards
B. Overview of the Proposal
II. Discussion
A. Proposed Amendments to Rule 0-10 of the Investment Company
Act
1. Raising the Net Asset Threshold
2. Group Definition Amendments
B. Proposed Amendments to Rule 0-7 of the Advisers Act
1. The RAUM Threshold
2. The Total Assets Threshold
3. The Control Relationship Threshold
4. Form ADV Amendments
C. Periodic Future Adjustments
III. Economic Analysis
IV. Paperwork Reduction Act
A. Introduction
B. Proposed Amendments to Form ADV
C. Proposed Amendments to Rule 0-7 of the Advisers Act and Rule
0-10 of the Investment Company Act
D. Total Estimated Burden
E. Request for Comments
V. Regulatory Flexibility Act Certification
VI. Consideration of Impact on the Economy
VII. Other Matters
Statutory Authority

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 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\
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\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 <a href="https://www.sec.gov/resources-small-businesses/office-small-business-policy-division-corporation-finance">https://www.sec.gov/resources-small-businesses/office-small-business-policy-division-corporation-finance</a>. 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 <a href="https://www.sec.gov/about/divisions-offices/office-advocate-small-business-capital-formation">https://www.sec.gov/about/divisions-offices/office-advocate-small-business-capital-formation</a>. 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
<a href="https://www.sec.gov/about/divisions-offices/office-advocate-small-business-capital-formation">https://www.sec.gov/about/divisions-offices/office-advocate-small-business-capital-formation</a>. 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 <a href="https://www.sec.gov/about/advisory-committees/small-business-capital-formation-advisory-committee">https://www.sec.gov/about/advisory-committees/small-business-capital-formation-advisory-committee</a>.
\2\ Public Law 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.
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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\
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\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.

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[[Page 1109]]

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\
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\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 <a href="https://www.sec.gov/files/2024-oasb-annual-forum-report.pdf">https://www.sec.gov/files/2024-oasb-annual-forum-report.pdf</a>; 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 <a href="https://www.sec.gov/files/rules/petitions/2023/petn4-811.pdf">https://www.sec.gov/files/rules/petitions/2023/petn4-811.pdf</a>; 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 <a href="https://www.sec.gov/files/final-recommendations-amac-sec-small-advisers-and-funds-110321.pdf">https://www.sec.gov/files/final-recommendations-amac-sec-small-advisers-and-funds-110321.pdf</a>;
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 <a href="https://home.treasury.gov/system/files/136/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf">https://home.treasury.gov/system/files/136/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf</a>.
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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 common
investment adviser or have investment advisers that are affiliated
persons of each other; or (ii) have a common administrator.\13\
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\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).
\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.
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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.
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\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.
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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

[[Page 1110]]

proposing rules, and then go through a particular process in weighing
public input on the IRFA and small entity considerations when adopting
these rules.
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\18\ 5 U.S.C. 604 (setting forth the requirements for the FRFA).
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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 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\
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\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.
\22\ 5 U.S.C. 611; see Public Law 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.
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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
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\
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\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).
\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).
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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.
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\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.''
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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 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.''
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\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.
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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
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\
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\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).
\32\ Rule 0-10(b).

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[[Page 1111]]

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\
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\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).
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\37\ 1982 Adopting Release, supra footnote 8.
\38\ See 1997 Proposing Release, supra footnote 33, at n.57.
---------------------------------------------------------------------------

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 (Dodd-Frank 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.
---------------------------------------------------------------------------

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.

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[[Page 1112]]

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:
<bullet> 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\
---------------------------------------------------------------------------

\48\ Unless stated otherwise, the use of ``fund family'' or
``fund families'' in this release has the same meaning as ``family
of investment companies.''
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<bullet> 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;
<bullet> 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;
<bullet> Amend Form ADV to revise the instructions and Item 12 of
Part 1A of Form ADV, including through making conforming changes; and
<bullet> 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'').
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).
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

\50\ Investment Company Institute, 2025 Investment Company Fact
Book (2025), at Data Tables, available at <a href="https://www.icifactbook.org/25-fb-data-tables.html">https://www.icifactbook.org/25-fb-data-tables.html</a> (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'').
\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.
---------------------------------------------------------------------------

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
decreasing expense ratios across open-end funds generally \57\--the
approach

[[Page 1113]]

taken in 1982 may no longer be appropriate to set a small entity
threshold.\58\
---------------------------------------------------------------------------

\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 <a href="https://www.ici.org/system/files/attachments/2002_factbook.pdf">https://www.ici.org/system/files/attachments/2002_factbook.pdf</a>;
Investment Company Fact Book (2025), available at <a href="https://www.ici.org/system/files/2025-05/2025-factbook.pdf">https://www.ici.org/system/files/2025-05/2025-factbook.pdf</a>.
\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 <a href="https://www.morningstar.com/business/insights/blog/funds/us-fund-fee-study">https://www.morningstar.com/business/insights/blog/funds/us-fund-fee-study</a>.
\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\59\ Based on data reported on Form N-CEN through Jan. 21, 2025.

Table 1--Distribution of Assets Across Funds and Fund Families \59\
----------------------------------------------------------------------------------------------------------------
% of individual funds % of fund assets \3\ in
Percentile of fund families \1\ at or Net asset threshold \2\ in fund families at fund families at or
below threshold or below threshold below threshold
----------------------------------------------------------------------------------------------------------------
10th................................. $23.7 million.......... 0.87% 0.0016%
20th................................. $68.4 million.......... 1.84 0.01
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
80th................................. $10.04 billion......... 22.91 2.13
90th................................. $43.47 billion......... 37.87 6.99
100th................................ $9,450.72 billion...... 100.00 100.00
----------------------------------------------------------------------------------------------------------------
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 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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

[[Page 1114]]

convenience in the proposed rule. The proposed $10 billion threshold
would 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. 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\
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\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.
\64\ See supra section I.A.2.a.
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

\65\ See infra footnote 126.
---------------------------------------------------------------------------

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
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\
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\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.
---------------------------------------------------------------------------

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 analyzing
this and other data collected on Form N-CEN.\69\
---------------------------------------------------------------------------

\68\ Proposed rule 0-10(a)-(b).
\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).

---------------------------------------------------------------------------

[[Page 1115]]

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 0-10 alongside the existing definition
of ``family of investment companies'' from Form N-CEN:

Table 2
----------------------------------------------------------------------------------------------------------------
``Group of related investment companies'' ``Family of investment companies''
----------------------------------------------------------------------------------------------------------------
(a) . . . ``Family of investment companies'' means,
(1) In the case of a management company, group of related except for insurance company separate
investment companies means two or more management companies accounts, any two or more registered
(including series thereof) that: investment companies that:
(i) Hold themselves out to investors as related companies for (i) share the same investment adviser or
purposes of investment and investor services; and principal underwriter; and
(ii) Either: (ii) hold themselves out to investors as
(A) Have a common investment adviser or have investment advisers related companies for purposes of investment
that are affiliated persons of each other; or and investor services.
(B) Have a common administrator Insurance company separate accounts that may
(2) In the case of a unit investment trust, the term group of not hold themselves out to investors as
related investment companies shall mean two or more unit related companies (products) for purposes of
investment trusts (including series thereof) that have a common investment and investor services should
sponsor. consider themselves part of the same family
(b) Special rule for insurance company separate accounts. In if the operational or accounting or control
determining whether an insurance company separate account is a systems under which these entities function
small business or small entity pursuant to paragraph (a) of are substantially similar.
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 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.
---------------------------------------------------------------------------

\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).
---------------------------------------------------------------------------

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 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

[[Page 1116]]

become subject to the holding out prong because all investment
companies generally follow the same test under the definition of
``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.
---------------------------------------------------------------------------

\72\ Rule 0-10(a)(2).
\73\ See Instruction to Item B.5 of Form N-CEN.
---------------------------------------------------------------------------

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'').
---------------------------------------------------------------------------

\74\ Rule 0-10(b).
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

\75\ See N-SAR Release, supra footnote 69.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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?
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 threshold
for adviser registration that had been enacted under NSMIA in 1996.\79\
As a result, nearly all

[[Page 1117]]

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.
---------------------------------------------------------------------------

\78\ Proposed rule 0-7(a)(1) under the Advisers Act.
\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. 80b-3a(a)(1)(A)'' because the RAUM Threshold, as
proposed, would exceed and thus not align with the minimum threshold
for adviser registration.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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.).
\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.

Table 3--Distribution of Investment Advisers and RAUM \83\
----------------------------------------------------------------------------------------------------------------
Individual RAUM of Total RAUM of all advisers at
adviser at Total number of all or below percentile
Percentile of advisers percentile \84\ advisers at or below -------------------------------
(millions) percentile (millions) (percent)
----------------------------------------------------------------------------------------------------------------
10th.................................. $33 2,172 $21,482 0.0
20th.................................. 96 4,331 151,003 0.1
25th.................................. 125 5,414 271,591 0.2
50th.................................. 324 10,827 1,399,259 0.9
55th.................................. 399 11,910 1,788,139 1.2
60th.................................. 500 12,993 2,271,386 1.5
65th.................................. 632 14,075 2,879,161 1.9
70th.................................. 834 15,158 3,665,541 2.4
75th.................................. 1,130 16,240 4,711,141 3.1
80th.................................. 1,654 17,323 6,182,565 4.0
85th.................................. 2,612 18,406 8,342,641 5.5
90th.................................. 4,944 19,488 12,370,725 8.1
95th.................................. 14,040 20,571 21,290,612 13.9
100th................................. 10,246,596 21,654 152,878,412 100.0
----------------------------------------------------------------------------------------------------------------

[[Page 1118]]

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 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\
---------------------------------------------------------------------------

\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).
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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\
---------------------------------------------------------------------------

\87\ See supra footnote 61.
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

\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 <a href="https://www.sec.gov/comments/4-811/4-811.htm">https://www.sec.gov/comments/4-811/4-811.htm</a>.
\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).
---------------------------------------------------------------------------

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, 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\
---------------------------------------------------------------------------

\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.
\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.
---------------------------------------------------------------------------

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
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

[[Page 1119]]

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\
---------------------------------------------------------------------------

\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 <a href="https://advocacy.sba.gov/wp-content/uploads/2024/05/Comment-Letter-FInCEN-Investment-Advisors.pdf">https://advocacy.sba.gov/wp-content/uploads/2024/05/Comment-Letter-FInCEN-Investment-Advisors.pdf</a>.
\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.
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

\98\ See supra footnote 28 and section I.A.3.a.
---------------------------------------------------------------------------

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
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 non-small 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 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)?
---------------------------------------------------------------------------

\99\ For discussion related to employee-based size standards,
see supra footnotes 88-96 and accompanying text.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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?
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\101\ See supra section II.A.1.
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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

[[Page 1120]]

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 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\
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\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.
\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.
---------------------------------------------------------------------------

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
modify the Total Assets Threshold at this time, but are requesting
comment on possible changes to the threshold.
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\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.
---------------------------------------------------------------------------

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 inflation-adjust 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 cross-referencing that rule
in rule 0-7 under the Advisers Act? Are there other total asset
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, 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

[[Page 1121]]

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 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.
---------------------------------------------------------------------------

\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 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).
---------------------------------------------------------------------------

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 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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 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?
---------------------------------------------------------------------------

\115\ See supra sections II.B.1 and II.B.2.
---------------------------------------------------------------------------

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

[[Page 1122]]

why? Are they different from the types of factors that may already be
used to rebut the presumption of control arising from ownership?
---------------------------------------------------------------------------

\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.'').
---------------------------------------------------------------------------

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 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 0-7.\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.
---------------------------------------------------------------------------

\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.
\121\ A registered or registering investment adviser which can
respond ``no'' to each question in Item 12 has not exceeded the RAUM
Threshold, Total Assets Threshold, or Control Relationship
Threshold.
---------------------------------------------------------------------------

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 information on the elements of the
small entity definition--to align with the proposed Total Assets
Threshold and Control Relationship Threshold. Finally, we are proposing
to revise Item 12 in order to: (i) provide more context regarding the
significance of Item 12 in determining whether an adviser is a ``small
entity,'' (ii) reference updates to the form by the Commission to
reflect changes to these thresholds due to the Inflation Adjustment
Mechanism, and (iii) explain that the thresholds in Item 12 will be
adjusted in conformity with the thresholds in rule 0-7.
---------------------------------------------------------------------------

\122\ See current Form ADV, Part 1A, Item 12.
---------------------------------------------------------------------------

We request comment on all aspects of the proposed revisions to Form
ADV, including the following items:
30. Should Form ADV be revised to conform to the proposed revisions
to rule 0-7, as proposed? Do commenters foresee any difficulties
arising from increasing the RAUM threshold in Instruction 17 under
which investment advisers may seek a continuing hardship exemption from
electronic filing requirements? Are investment advisers with greater
than $25 million in RAUM likely to take advantage of this continuing
hardship exemption?
31. Should the Commission amend Form ADV to require investment
advisers to report additional information regarding their total assets?
For example, in addition to what is already required, should Item 1.O
be amended to require an investment adviser to report its total assets
on the last day of its most recent fiscal year, to report whether it
has $5 million (or any revised threshold adopted by the Commission) or
more in assets on the last day of its most recent fiscal year, or to
report any other range?
32. Should the Commission amend Form ADV to require investment
advisers to report additional information regarding other persons
(other than natural persons) that the investment adviser controls? For
example, should an investment adviser have to report the approximate
total assets of persons (other than private funds reported in Section
7.B.(1)) that the investment adviser controls in Section 7.A. of
Schedule D of Form ADV, as of the last day of the person's most recent
fiscal year?
33. Should the Commission amend Form ADV to require investment
advisers to report additional information regarding other persons
(other than natural persons) that control or are under common control
with the investment adviser? What information could be requested here
that would assist the Commission in establishing that a controlled
investment adviser is a ``small entity'' for the purposes of the
analyses conducted under the RFA?
34. Should the Commission require investment advisers to report
additional information regarding the nature of their control
relationships? For example, if the Commission required an investment
adviser to report whether it received financial or administrative
assistance from a person (other than a natural person) it is in a
control relationship with, should the absence of such assistance impact
whether an investment adviser is considered a ``small entity'' for
purposes of the RFA?
35. Does the text proposed to be added to Item 12 clarify that an
investment adviser that is required to answer Item 12 and is properly
able to respond ``no'' to each question in Item 12.A, B, and C is
considered a ``small entity'' for the purposes of the analyses
conducted under the RFA? Should the Commission require investment
advisers to self-report their ``small entity'' status following
completion of Item 12, or would it be helpful to add an automated
message in the Investment Adviser Registration Depository (``IARD'')
indicating an investment adviser's reported ``small entity'' status
once it properly completes Item 12? Would indicating an investment
adviser's reported ``small entity'' status be useful for investors
reviewing Form ADV filings or for investment advisers completing Form
ADV?

[[Page 1123]]

36. Should the Commission require exempt reporting advisers to
complete Item 12 or report their RAUM on Form ADV? If so, how should
exempt reporting advisers report their RAUM?
37. Should the Commission remove the parenthetical ``(because you
have assets under management of less than $25 million)'' from
Instruction 17? Would it provide investment advisers with useful
information if the Commission instead left the parenthetical in
Instruction 17 and periodically updated the threshold amount for
inflation in accordance with the proposed rule 0-7(c)? Why or why not?
38. Does the additional language proposed to be added to Item 12
regarding the inflation adjustment make clear that the thresholds in
that item would be adjusted for inflation in conformity with the
inflation adjustments to the thresholds in rule 0-7? Would referencing
the inflation adjustments create confusion for investment advisers
filling out Item 12? Why or why not?

C. Periodic Future Adjustments

In addition to proposing to adjust the asset-based thresholds, we
are also proposing amendments to rules 0-7 and 0-10 that would provide
a mechanism for periodic future adjustments of the asset-based
thresholds used in these rules' small entity definitions.\123\
Specifically, the amendments would provide that the Commission will
issue an order every ten years adjusting: (i) the net asset threshold
in the investment company small entity definition; and (ii) in the
investment adviser small entity definition, the RAUM Threshold, the
Total Assets Threshold, and the assets under management and total
assets aspects of the Control Relationship Threshold.
---------------------------------------------------------------------------

\123\ Proposed rule 0-10(c); proposed rule 0-7(c).
---------------------------------------------------------------------------

In proposing to adjust certain asset-based thresholds for ``small
entity'' definitions as discussed above, the Commission considered an
analysis of the distribution of fund and adviser assets and the growth
in these assets over time. The thresholds provided for by the
amendments would improve the utility of the RFA analysis at adoption in
a manner, for the reasons discussed above, that is more appropriate
than the alternatives we considered (e.g., an employee-based or
revenue-based size standard or inflation adjusting the current
thresholds). These proposed thresholds, however, may become less useful
over time due to growth in markets and any subsequent changes in the
investment company and investment adviser industries. The proposed
adjustment would ensure that the thresholds are adjusted every ten
years, because the adjustment would be required by rule and effected
through a Commission order. Adjustments that the Commission makes
mechanically by order could help maintain the thresholds at levels that
reflect the buying power of money over time, without the need for
Commission action through rulemaking. The Commission has historically
incorporated automatic inflation adjustments to certain dollar-based
thresholds in regulations affecting investment companies and investment
advisers.\124\ These automatic adjustments reflect that some level of
change in dollar value is reasonably anticipated to occur in the
future, and help ensure that the rules' intended application remains
consistent and relevant over time. We similarly expect that the
proposed adjustments would prevent the thresholds in the small entity
definitions from becoming less meaningful over time on account of
anticipated changes in dollar value. Specifically, because a fund's
size is related to its ability to bear compliance costs, adjusting the
asset-based thresholds is designed to account for potential increases
in those compliance costs. It is possible, but less predictable, that
the net asset thresholds may become less useful over time even taking
the proposed adjustments into account (for example, with the advent of
market events, changes in the makeup or distribution of size of the
fund or adviser markets, or other industry changes). In this case, the
Commission could consider performing appropriate analyses to propose
amendments to the thresholds again in the future.
---------------------------------------------------------------------------

\124\ See, e.g., rule 3c-7 under the Investment Company Act;
rule 205-3 under the Advisers Act; see also infra footnote 128.
---------------------------------------------------------------------------

Unlike our analysis that informed the proposed increases to the
asset-based thresholds, inflation is a known factor for which a precise
value can reliably be derived from a defined index. The proposed
amendments to rule 0-10 and rule 0-7 would require that the adjustment
of the asset-based thresholds be calculated by reference to the
Personal Consumption Expenditures Chain-Type Price Index (the ``PCE
Index''),\125\ which is published by the Department of Commerce.\126\
The PCE Index is often used as an indicator of inflation in the U.S.
economy.\127\ Additionally, the Commission routinely has used the PCE
Index in similar contexts in Commission rules, and it is also used in
provisions of the federal securities laws.\128\ We are proposing to

[[Page 1124]]

use the PCE Index to calculate inflation adjustments for this
rulemaking for consistency with other Commission rules, and because the
methodology and scope of the PCE Index reflects a broad sector of the
U.S. economy.
---------------------------------------------------------------------------

\125\ Proposed rule 0-10 would require the net asset threshold
for small entities be adjusted for inflation by (i) dividing the
year-end value of the PCE Index for the calendar year preceding the
calendar year in which the order is being issued, by the year-end
value of the PCE Index for the calendar year any final rule is
adopted, (ii) multiplying $10 billion (i.e., the proposed net asset
threshold) by that quotient, and (iii) rounding the product to the
nearest multiple of $1 billion. Proposed rule 0-7(c)(1) would adjust
the RAUM Threshold and assets under management aspects of the
Control Relationship Threshold by starting with the same quotient
but would multiply that by $1 billion, rounded to the nearest
multiple of $100 million. Proposed rule 0-7(c)(2) would, as
discussed above, adjust the Total Assets Threshold and the net
assets aspect of the Control Relationship Threshold by multiplying
the same quotient by $5 million, rounded to the nearest multiple of
$500,000. See also supra section II.B.2.
\126\ The values of the PCE Index are available from the Bureau
of Economic Analysis, a bureau of the Department of Commerce. See
<a href="https://www.bea.gov">https://www.bea.gov</a>. The PCE Index measures the prices that people
living in the United States, or those buying on their behalf, pay
for goods and services. The PCE Index is known for capturing
inflation (or deflation) across a wide range of consumer expenses
and reflecting changes in consumer behavior. See <a href="https://www.bea.gov/data/personal-consumption-expenditures-price-index">https://www.bea.gov/data/personal-consumption-expenditures-price-index</a>.
\127\ See, e.g., Clinton P. McCully, Brian C. Moyer & Kenneth J.
Stewart, Comparing the Consumer Price Index and the Personal
Consumption Expenditures Price Index, SURVEY OF CURRENT BUS., Nov.
2007, at 26, n.1 (PCE Index measures changes in ``prices paid for
goods and services by the personal sector in the U.S. national
income and product accounts'' and is primarily used for
macroeconomic analysis and forecasting); see also FEDERAL RESERVE
BOARD, MONETARY POLICY REPORT TO THE CONGRESS, at n.1 (Feb. 17,
2000), available at <a href="https://www.federalreserve.gov/boarddocs/hh/2000/february/ReportSection1.htm#FN1">https://www.federalreserve.gov/boarddocs/hh/2000/february/ReportSection1.htm#FN1</a> (noting the reasons for using
the PCE Index rather than the consumer price index).
\128\ See, e.g., Qualifying Venture Capital Funds Inflation
Adjustment, Investment Company Act Release No. 35305 (Aug. 24, 2024)
[89 FR 70479 (Aug. 30, 2024)] (adopting a rule that adjusts for
inflation the dollar threshold used in defining a ``qualifying
venture capital fund'' using the PCE Index); Investment Adviser
Performance Compensation, Investment Advisers Act Release No. 3372
(Feb. 15, 2012) [77 FR 10358, 10367 (Feb. 22, 2012)] (stating that
the Commission is using the PCE Index in connection with required
inflation adjustments to the dollar thresholds in the definition of
``qualified client'' appearing in 17 CFR 275.205-3, and stating that
the PCE Index is widely used as a broad indicator of inflation in
the economy); Definitions of Terms and Exemptions Relating to the
``Broker'' Exceptions for Banks, Securities Exchange Act Release No.
56501 (Sept. 24, 2007) [72 FR 56514 (Oct. 3, 2007)] (using PCE Index
in adopting periodic inflation adjustments to the fixed-dollar
thresholds for both ``institutional customers'' and ``high net worth
customers'' under rule 701 of Regulation R ``because it is a widely
used and broad indicator of inflation in the U.S. economy''); see
also Amendments to Form ADV, Investment Advisers Act Release No.
3060 (July 28, 2010) [75 FR 49234 (Aug. 12, 2010)] (using PCE Index
in increasing for inflation the threshold amount for prepayment of
advisory fees that triggers an adviser's duty to provide clients
with an audited balance sheet and the dollar threshold triggering
the exception to the delivery of brochures to advisory clients
receiving only impersonal advice). The Dodd-Frank Act also requires
the use of the PCE Index to calculate inflation adjustments for the
cash limit protection of each investor under the Securities Investor
Protection Act of 1970. See section 929H(a) of the Dodd-Frank Act,
15 U.S.C. 78fff-3.
---------------------------------------------------------------------------

We are proposing a schedule of adjusting the investment company and
investment adviser small entity asset thresholds for inflation every 10
years. Given the distributions of different-sized entities for
investment companies and investment advisers, inflationary changes over
shorter periods would generally not result in a meaningfully different
set of investment companies and investment advisers being considered
small entities under their respective definitions. Additionally,
implementing more frequent adjustments would pose challenges for the
Commission's RFA analysis because more frequent inflation adjustments
make it more likely that a fund's or adviser's small entity status
would change between proposal and adoption.
The proposed amendments providing for future inflation adjustment
to the investment company small entity net asset threshold would
require rounding to the nearest multiple of $1,000,000,000. The
proposed amendments to the investment adviser small entity RAUM
Threshold and assets under management aspect of the Control
Relationship Threshold would require rounding to the nearest multiple
of $100,000,000 whereas the amendments to the Total Assets Threshold
and total assets aspect of the Control Relationship Threshold would
require rounding to the nearest multiple of $500,000. Due to the
magnitude of each of these thresholds ($10 billion, $1 billion and $5
million respectively), rounding with greater specificity would not be a
useful differentiator of funds' or advisers' ability to bear regulatory
cost due to size.\129\
---------------------------------------------------------------------------

\129\ We are proposing to round all the asset-based thresholds
to the nearest 10% of the amount of the adjusted threshold. See
proposed rule 0-7(c)(1)(ii) and (c)(2)(ii) and proposed rule 0-
10(c)(2).
---------------------------------------------------------------------------

We request comment on all aspects of the proposed amendments to
rules 0-10 and 0-7 that would provide for periodic future inflation
adjustments to the asset-based thresholds used in these rules' small
entity definitions, including the following items:
39. Should the Commission adopt the proposed mechanism for periodic
adjustments of the small entity asset-based thresholds in rule 0-10 and
rule 0-7 by order, and if not, why not? Is adjusting for inflation the
best mechanism for determining this periodic adjustment? If so, is the
PCE Index the price index best suited for this purpose? Are there other
price indexes, such as the Consumer Price Index for All Urban
Consumers, the Producer Price Index, or the GDP Price Deflator, that
would be better suited for this purpose, and why?
40. Instead of or in addition to periodically adjusting for
inflation, should the Commission periodically and mechanically adjust
the small entity thresholds to reflect any other metric? If so, why?
For example, should the Commission periodically and mechanically adjust
the thresholds to reflect overall growth in the markets (as a proxy for
asset growth in the investment company and investment adviser
industries) by reference to a securities market index or a blend of
security market indexes? If so, what index, or blend of indexes, would
be appropriate, given that funds and advisers invest in all types of
securities, including in private markets? Should the Commission make
periodic adjustments to the asset thresholds in order to maintain a
fixed percentage of investment companies and investment advisers as
small entities? Should this percentage be of fund families, total
number of entities, total industry assets or some other metric? If the
Commission were to maintain a fixed percentage of small entities, what
should that percentage be for investment companies and for investment
advisers? For example, should it be the percentages that result
following the proposed increase in asset thresholds in rules 0-10 and
0-7, as discussed above?
41. Is 10 years an appropriate timeframe for future adjustments for
the investment company and investment adviser small entity asset
thresholds and if not, why not? Would a shorter or longer timeframe
such as 1, 3, 5 or 15 years be more appropriate? Would different
timeframes be appropriate for investment companies and investment
advisers? Should there be circumstances where the rules specify that
the periodic adjustment should not occur or should be postponed (e.g.,
in the case of a significant market downturn that extends beyond a
certain period)?
42. Should the Commission select an adjustment cycle that starts on
a specified year, rather than based on the date of final adoption? For
instance, if the Commission were to adopt these rules in 2026, should
the first adjustment occur in 2035 and then every 10 years thereafter
(e.g., 2045, 2055, 2065, etc.)? Should the adjustment period coincide
with the adjustment cycles for other rules? \130\
---------------------------------------------------------------------------

\130\ See supra footnote 128.
---------------------------------------------------------------------------

43. When calculating the inflation-adjusted asset thresholds,
should we round the dollar amount or use an exact number for the
threshold? If we are rounding, is rounding to the proposed amounts the
appropriate level of specificity for these calculations? Are there any
considerations that are unique to any of the asset-based thresholds?
Please supply explanations and reasoning.

III. Economic Analysis

The Commission is mindful of the economic effects, including the
costs and benefits, of its rules. The Commission has a long-held focus
on small entities when engaged in rulemaking. 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 stated objectives of applicable statutes.\131\ 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.\132\ In applicable rulemakings, the
Commission's definitions of ``small entities'' determine the scope of
the IRFA and FRFA. The proposed definitions are expected to 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. 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.
To the extent such adaptations to future rulemakings would occur, the
use of the amended definitions of ``small entities'' in RFA analyses
could result in different benefits and costs of such rulemakings. For
example, if the Commission, informed by the more tailored RFA analyses,
determined to scope fewer small entities into future rulemakings or
tailor obligations imposed by such rulemakings differently for small
entities, there could be fewer compliance costs imposed on such
entities.
---------------------------------------------------------------------------

\131\ See supra footnote 2.
\132\ See supra footnote 3.
---------------------------------------------------------------------------

In addition to these indirect effects, the proposed rule would have
direct economic effects where the proposed small entity definitions
would affect the

[[Page 1125]]

application of existing Commission rules and regulations. Currently,
the Commission's definition of ``small entity'' under the RFA is
incorporated into the Commission's other rules and regulations only in
connection with an adviser's responses to Form ADV (and the Commission
is proposing to make corresponding amendments to the form). We thus
consider the effects of the proposed definition as it relates to the
use of that definition in Form ADV as well as the effects of the
associated proposed changes to the form.
First, the proposal would amend Form ADV to revise Instruction 17
of the General Instructions, which currently permits registered or
registering investment advisers to receive a continuing hardship
exemption from Form ADV electronic filing requirements, pursuant to
rule 203-3(b), if such investment adviser is a small business and can
demonstrate that filing Form ADV electronically would impose an undue
hardship. Instruction 17, as revised, defines an investment adviser as
a ``small business'' or ``small organization'' if it is required to
answer Item 12 (which itself relies on the definition in rule 0-7) and
it is able to respond ``no'' to each question in Item 12. Since the
proposed amendments to Item 12, in conformity with rule 0-7, would
reflect that the RAUM Threshold was increased from $25 million to $1
billion, Instruction 17 would similarly reflect this increase in the
threshold for the availability of the continuing hardship
exemption.\133\ Approximately 10,051 \134\ additional registered
investment advisers may be eligible for the exemption under the revised
definition, as reflected in the amended Instruction 17, before any
future adjustment for inflation.\135\
---------------------------------------------------------------------------

\133\ See supra section II.B.4II.B.4.
\134\ This estimate captures the number of registered investment
advisers with RAUM equal to or above $25 million but below $1
billion. See infra footnote 149.
\135\ See supra section II.C.
---------------------------------------------------------------------------

We expect that the increased availability of the continuing
hardship exemption to registered investment advisers meeting the
proposed definition would have minimal economic impact. Due to the
ubiquity of inexpensive access to computers and the internet--both to
advisers themselves and to the service providers they may employ--any
newly eligible advisers are unlikely to be able to demonstrate that
filing Form ADV electronically would impose an undue hardship.\136\ We
therefore anticipate that few, if any, additional advisers would be
able to rely on the exemption.
---------------------------------------------------------------------------

\136\ The Commission has not received applications for the
continuing hardship exemption in recent years. In addition, advisers
may still be eligible for the temporary hardship exemption under 17
CFR 275.203-3(a), regardless of whether they are a small business or
small organization, if they experience unforeseen technical
difficulties.
---------------------------------------------------------------------------

Second, the proposal would amend Item 12 of Part 1A of Form ADV to
align the RAUM threshold for completing the questions in that item with
the proposed amendments to the definitions of ``small business'' and
``small organization'' under rule 0-7; the amendments to that item
would also revise the questions in Items 12.B.(1) and C.(1) to collect
information on the elements of the amended small entity
definition.\137\ As a result, approximately 10,051 \138\ additional
registered investment advisers would be required to complete Item 12 of
Part 1A (before any future adjustment for inflation).\139\ Because the
information to complete the corresponding questions would be readily
available to advisers, we estimate that the cost increase for each
affected adviser would be minimal, averaging approximately $95 per
adviser per year.\140\
---------------------------------------------------------------------------

\137\ See supra section II.B.4II.B.4.
\138\ See supra footnote 134.
\139\ See supra section II.C.
\140\ The $95 is based on the following calculations: hourly
rate of a Management Analyst in the securities industry at $378 for
0.25 hours [ap] $95. See infra footnote 151.
---------------------------------------------------------------------------

We use a discount rate to adjust for differences in the timing of
estimated benefits and costs.\141\ Table 4 presents the discounted
present value of expected annualized benefits and costs that are
monetized in our economic analysis, using real discount rates of 3
percent and 7 percent.\142\ We use a 10-year horizon that encompasses
the principal expected benefits and costs that are monetized in the
economic analysis.\143\
---------------------------------------------------------------------------

\141\ See OMB, CIRCULAR A-4, at 32 (Sept. 17, 2003) (discussing
the main rationales for this understanding).
\142\ Consistent with OMB Circular A-4 and to reflect the
difference in timing of economic effects when benefits and costs do
not take place in the same time period, the Commission presents
monetized economic effects using discount factors. See id. at 31-34
(stating that, ``[f]or regulatory analysis, [agencies] should
provide estimates of net benefits using both 3 percent and 7
percent'' discount rates and discussing why those rates are
reasonable default rates).
\143\ See id. at 31 (stating that ``[t]he ending point should be
far enough in the future to encompass all the significant benefits
and costs likely to result from the rule'').

Table 4--Present Discounted Value of Monetized Benefits and Costs (in 2025 $) Over a 10-Year Time Horizon \1\
----------------------------------------------------------------------------------------------------------------
Estimated effects 3% Real discount rate 7% Real discount rate
----------------------------------------------------------------------------------------------------------------
Benefits.................................................... n/a n/a
Costs....................................................... \2\ $8,266,294 \3\ $6,937,187
----------------------------------------------------------------------------------------------------------------
\1\ This Table includes only benefits and costs that are monetized in the economic analysis.
\2\ We estimate recurring annual compliance costs of approximately $95 per adviser for 10,051 affected advisers.
The resulting aggregate annual burden is $954,845. We assume that these costs are incurred in a steady stream,
and we apply mid-year discount factors.
\3\ Id.

We do not anticipate that the proposed amendments would have any
direct effects on efficiency, competition, or capital formation
because, as discussed above, they would have minimal direct economic
impact. But to the extent that the amended definitions of ``small
entities'' contribute to the Commission better tailoring its rulemaking
to account for the regulatory challenges faced by small entities, they
could have indirect effects on efficiency, competition, and capital
formation resulting from future rulemakings. For example, if the
Commission, informed by the more tailored RFA analyses, determined to
tailor future rulemakings to reduce compliance costs for small
entities, there could be benefits to competition.
Lastly, the Commission considered alternatives to the proposed
amendments to Form ADV to align the form with the amended
definition.\144\ Specifically, we considered replacing Item 12 of Part
1A of Form ADV with a single question that would ask

[[Page 1126]]

advisers to indicate whether they fall under the amended small entity
definition, instead of providing the information in Items 12.A, B, and
C that would allow the Commission to continue to make that
determination, under the amended definition. While the alternative
would streamline the information reported in that item, we understand
that it would not reduce costs for advisers because an adviser would
still have to gather from its own records the information needed to
apply the small entity definition.\145\ In addition, maintaining the
requirement for advisers to report the information needed to apply the
``small entity'' definition would continue to provide the Commission
with insight into the class of small entity advisers and how the
individual parts of the definition affect whether advisers qualify as a
small entity.
---------------------------------------------------------------------------

\144\ Given the scope and context for this rulemaking, the
Commission does not believe there are specific reasonable
alternatives to the proposed conforming changes to the instruction
for the continuing hardship exemption because these changes merely
align the language in the instruction with the amended small entity
definition and related changes to Item 12.
\145\ We anticipate that advisers would generate the necessary
records in the ordinary course of their advisory businesses. See
infra footnote 152.
---------------------------------------------------------------------------

We request comment on all aspects of the economic analysis of the
proposed amendments. To the extent possible, we request that commenters
provide supporting data and analysis on the benefits, costs, and
effects on competition, efficiency, and capital formation of the
proposed amendments or any reasonable alternatives.

IV. Paperwork Reduction Act

A. Introduction

The proposal would revise an existing ``collection of information''
within the meaning of the Paperwork Reduction Act of 1995 (the
``PRA'').\146\ The title for the collection of information is: ``Form
ADV'' (OMB control number 3235-0049). The Commission is submitting this
collection of information to the OMB for review and approval in
accordance with the PRA.\147\ An agency may not conduct or sponsor, and
a person is not required to respond to, a collection of information
unless it displays a currently valid OMB control number.
---------------------------------------------------------------------------

\146\ 44 U.S.C. 3501 et seq.
\147\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

We discuss below the collection of information burdens associated
with the proposed amendments to Form ADV. Responses to the disclosure
requirements of the proposed amendment to Form ADV are not kept
confidential.

B. Proposed Amendments to Form ADV

The proposal would amend Form ADV to revise Item 12 of Part 1A of
Form ADV to increase 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 under the
Advisers Act.\148\ The proposal would also revise the thresholds set
forth in Items 12.B.(1) and C.(1)--which collect information on the
elements of the small entity definition--to align with the proposed
changes to the Control Relationship Threshold. These collections of
information would provide information to the Commission and investors.
The Commission staff may also use the collection of information in its
examination and oversight program. Because the proposal would expand
the group of advisers that are required to provide responses to Item
12, an additional burden would be imposed on advisers that have between
$25 million and $1 billion in RAUM.
---------------------------------------------------------------------------

\148\ See supra section II.B.1.
---------------------------------------------------------------------------

We estimate this burden to amount to an average of fifteen minutes
(or 0.25 hours) annually per adviser. We estimate the number of
respondents to this information collection to be 10,850 advisers,
including 799 advisers that have less than $25 million in RAUM and may
already complete Item 12.\149\ Accordingly, we estimate the total
burden hours for the new Form ADV amendments to be 2,512.75 hours.\150\
We estimate that the total monetized cost to each registered investment
adviser that would be newly required to respond to Item 12 as a result
of the amendments would be approximately $94.50,\151\ and that the
total monetized cost for such advisers would be $949,819.50.\152\
---------------------------------------------------------------------------

\149\ This estimate is based on information reported by advisers
through the IARD. Based on IARD data as of Dec. 31, 2024, of the
15,909 SEC-registered advisers, 10,850 responded to Item 5.F. of
Part 1A of Form ADV indicating that they have RAUM of less than $1
billion, and 799 indicated that they have RAUM of less than $25
million.
\150\ 10,850 - 799 = 10,051 advisers. One-quarter (.25) hour x
10,051 advisers = 2,512.75 hours.
\151\ We estimate the cost at a rate of $378 per hour, which is
the compensation rate that we have calculated for a Management
Analyst in the securities industry. One-quarter (0.25) hours x $378
per hour = $94.50. To calculate the occupational hourly rates used
in this release, the Commission uses occupation-specific mean hourly
wage data from the Occupational Employment and Wage Statistics
(OEWS) program of the Bureau of Labor Statistics (BLS) for the
securities industry (NAICS 523). See Occupational Employment and
Wage Statistics, U.S. Bureau of Labor Statistics, <a href="https://www.bls.gov/oes/">https://www.bls.gov/oes/</a>; see also Standard Occupational Classification,
U.S. Bureau of Labor Statistics, <a href="https://www.bls.gov/soc/">https://www.bls.gov/soc/</a>
(describing occupational classification system used by BLS); Exec.
Off. of the President, Off. of Mgmt. & Budget, North American
Industry Classification System (2022), available at <a href="https://www.census.gov/naics/reference_files_tools/2022_NAICS_Manual.pdf">https://www.census.gov/naics/reference_files_tools/2022_NAICS_Manual.pdf</a>
(describing the industry classification system used by BLS and other
agencies). To account for any changes in wages between the data
reference period and when the data are released, the mean hourly
wage for each occupation is multiplied by the seasonally adjusted
employment cost index for private wages and salaries. See Employment
Cost Index, U.S. Bureau of Labor Statistics, <a href="https://www.bls.gov/eci/">https://www.bls.gov/eci/</a>. The adjusted mean hourly wage is then multiplied by a factor
that accounts for nonwage costs, such as bonuses, benefits, and
overhead. The nonwage cost adjustment factor is calculated as an
average over the 10 most recently available years of data of the
ratio of the Bureau of Economic Analysis's annual gross output data
for the securities industry to total annual wages across all
occupations for the securities industry's OEWS data. See Gross
Output by Industry, U.S. Bureau of Economic Analysis, <a href="https://www.bea.gov/data/industries/gross-output-by-industry">https://www.bea.gov/data/industries/gross-output-by-industry</a>; Occupational
Employment and Wage Statistics, U.S. Bureau of Labor Statistics,
<a href="https://www.bls.gov/oes/">https://www.bls.gov/oes/</a>. The final product is the occupational
hourly rate. See generally Updated Methodology for Calculating
Occupational Hourly Rates (Dec. 19, 2025), available at <a href="https://www.sec.gov/files/method-occupational-hourly-rates.pdf">https://www.sec.gov/files/method-occupational-hourly-rates.pdf</a>.
\152\ 2,512.75 hours x $378 per hour = $949,819.50. We do not
expect advisers to incur any external cost burden in connection with
this information collection because advisers generate the necessary
records in the ordinary course of their advisory businesses.
---------------------------------------------------------------------------

C. Proposed Amendments to Rule 0-7 of the Advisers Act and Rule 0-10 of
the Investment Company Act

Each of proposed rule 0-7 and rule 0-10 does not contain a
``collection of information'' requirement within the meaning of the
Paperwork Reduction Act of 1995 (the ``PRA''), nor does it create any
new filing, reporting, recordkeeping, or disclosure reporting
requirements.\153\ Accordingly, the PRA is not applicable.\154\
---------------------------------------------------------------------------

\153\ 44 U.S.C. 3502(3).
\154\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

D. Total Estimated Burden

We estimate that investment advisers that would be newly required
to respond to Item 12 of Part 1A of Form ADV would incur a total annual
hour burden resulting from the collections of information discussed
above of approximately 2,512.75 hours, at a monetized cost of
$949,819.50.\155\ The total external burden costs would be $0.
---------------------------------------------------------------------------

\155\ This estimate is based upon the following calculation:
2,512.75 hours x $378 per hour.
---------------------------------------------------------------------------

A chart summarizing the proposed components of the total annual
burden for investment advisers is below.

[[Page 1127]]

----------------------------------------------------------------------------------------------------------------
External
Form ADV description of new requirements Number of Internal burden hours burden
responses costs
----------------------------------------------------------------------------------------------------------------
Annual burden for making representations on Item 10,051 2,512.75 (0.25 hours per adviser). 0
12 of Part 1A of Form ADV.
----------------------------------------------------------------------------------------------------------------

We estimate the total burden associated with the proposed
amendments to Form ADV to amount to an average of one-quarter (0.25)
hours annually per adviser. The amendments do not require investment
advisers to collect any new types of information. The only differences
in burden hours and internal monetized costs between current and
proposed Item 12 of Part 1A of Form ADV will be determined by the
number of advisers newly required to respond to Item 12.

E. Request for Comments

We request comment on whether our estimates for burden hours and
any external costs as described above are reasonable. Pursuant to 44
U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (i)
evaluate whether the proposed collections of information are necessary
for the proper performance of the functions of the Commission,
including whether the information will have practical utility; (ii)
evaluate the accuracy of the Commission's estimate of the burden of the
proposed collections of information, including whether the estimates
are too high or too low; (iii) determine whether there are ways to
enhance the quality, utility, and clarity of the information to be
collected; and (iv) determine whether there are ways to minimize the
burden of the collections of information on those who are to respond,
including through the use of automated collection techniques or other
forms of information technology.
In addition to these general requests for comment, we also request
comment specifically on the following issues:
44. Our analysis relies upon certain assumptions, such as that it
will take advisers approximately one-quarter (0.25) hours per year to
respond to the proposed amendments to Item 12. Do commenters agree with
these assumptions? If not, why not, and what data would commenters
recommend that we use?
Persons wishing to submit comments on the collection of information
requirements of the proposed amendments should direct them to the OMB
Desk Officer for the Securities and Exchange Commission,
<a href="/cdn-cgi/l/email-protection#4409061c6a0b09066a0b0d16056a1701071b2021372f1b2b22222d272136042b29266a212b346a232b32"><span class="__cf_email__" data-cfemail="91dcd3c9bfdedcd3bfded8c3d0bfc2d4d2cef5f4e2facefef7f7f8f2f4e3d1fefcf3bff4fee1bff6fee7">[email&#160;protected]</span></a>, and should send a copy to
Vanessa A. Countryman, Secretary, Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549-1090, with reference to File No.
S7-2026-01. OMB is required to make a decision concerning the
collections of information between 30 and 60 days after publication of
this release; therefore, a comment to OMB is best assured of having its
full effect if OMB receives it within 30 days after publication of this
release. Requests for materials submitted to OMB by the Commission with
regard to these collections of information should be in writing, refer
to File No. S7-2026-01, and be submitted to the Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC
20549-2736.

V. Regulatory Flexibility Act Certification

The RFA \156\ requires the SEC to prepare and make available for
public comment an initial regulatory flexibly analysis of the impact of
the proposed rule amendments on small entities, unless the SEC
certifies that the rules, if adopted would not have a significant
economic impact on a substantial number of small entities.\157\
Pursuant to section 605(b) of the RFA, the SEC hereby certifies that
the proposed amendments to rule 0-10 under the Investment Company Act,
rules 0-7 and 203-3(b) under the Advisers Act, and Form ADV would not,
if adopted, have a significant economic impact on a substantial number
of small entities.
---------------------------------------------------------------------------

\156\ 5 U.S.C. 601 et seq.
\157\ See 5 U.S.C. 603(a) and 605(b).
---------------------------------------------------------------------------

For the purposes of the Advisers Act and the Regulatory Flexibility
Act, an investment adviser generally is a small entity if it: (i) has
assets under management having a total value of less than $25 million;
(ii) did not have total assets of $5 million or more on the last day of
the most recent fiscal year; and (iii) does not control, is not
controlled by, and is not under common control with 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 its most recent fiscal year.\158\
For the purposes of the Investment Company Act and the Regulatory
Flexibility Act, investment companies are considered small entities if
they, together with other funds in the same group of related funds,
have net assets of $50 million or less as of the end of its most recent
fiscal year.\159\
---------------------------------------------------------------------------

\158\ Rule 0-7.
\159\ Rule 0-10.
---------------------------------------------------------------------------

The Commission's proposed amendments to the Small Entity Rules
would ultimately affect its analyses under the RFA in future
rulemakings but would not themselves impose an economic impact on funds
or advisers. The proposed amendments to rule 203-3(b) are clarifying in
nature and would not impose a significant economic impact on advisers.
While additional investment advisers would have to complete Item 12 of
Form ADV, the information required by this Item is readily available to
advisers and the additional cost of this change would be minimal.\160\
Therefore, there would be no significant economic impact on a
substantial number of small entities as a result of these proposed
amendments. The SEC encourages written comments on the certification.
Commentators are asked to describe the nature of any impact on small
entities and provide empirical data to support the extent of the
impact.
---------------------------------------------------------------------------

\160\ See supra footnote 140 and accompanying text.
---------------------------------------------------------------------------

The Commission understands that no regulatory flexibility analysis
is required for the proposed amendments. The proposed amendments to the
definitions of the terms ``small business'' and ``small organization''
for investment companies and investment advisers do not impose any
substantive requirements on small businesses.
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
SEC hereby certifies that the proposed amendments to Investment Company
Act rule 0-10, Advisers Act rule 0-7 and Form ADV would not, if
adopted, have a significant economic impact on a substantial number of
small entities.

VI. Consideration of Impact on the Economy

For purposes of SBREFA,\161\ we must advise OMB whether a
regulation constitutes a ``major'' rule. Under SBREFA, a rule is
considered ``major''

[[Page 1128]]

where, if adopted, it results in or is likely to result in (i) an
annual effect on the economy of $100 million or more; (ii) a major
increase in costs or prices for consumers or individual industries; or
(iii) significant adverse effects on competition, investment or
innovation.
---------------------------------------------------------------------------

\161\ Public Law 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).
---------------------------------------------------------------------------

We request comment on the potential impact of the proposed
amendments on the economy on an annual basis. Commenters are requested
to provide empirical data and other factual support for their views to
the extent possible.

VII. Other Matters

This action is a significant regulatory action under Executive
Order 12866, as amended, and has been reviewed by the Office of
Management and Budget.

Statutory Authority

The Commission is proposing the rule and form amendments contained
in this document under the authority set forth in chapter 6 of title 5
of the United States Code (particularly section 601 thereof [5 U.S.C.
601]), the Investment Company Act, particularly, section 38 thereof [15
U.S.C. 80a-37], the Advisers Act, particularly section 211 thereof [15
U.S.C. 80b-11].

List of Subjects in 17 CFR Parts 270, 275, and 279

Investment companies, Investment advisers, Reporting and
recordkeeping requirements, Administrative practice and procedure.

Text of Proposed Rule and Form Amendments

For the reasons set out in the preamble, the SEC proposes to amend
title 17, chapter II of the Code of Federal Regulations as follows:

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

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1. The authority citation for part 270 continues to read, in part, as
follows:

Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39,
1681w(a)(1), 6801-6809, 6825, and Pub. L. 111-203, sec. 939A, 124
Stat. 1376 (2010), unless otherwise noted.
* * * * *
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2. Amend Sec. 270.0-10 by:
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a. Revising paragraph (a).
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b. Removing paragraph (b).
0
c. Revising paragraph (c) and redesignating paragraph (c) as paragraph
(b).
0
d. Adding new paragraph (c).
The revisions read as follows:

Sec. 270.0-10 Small entities under the Investment Company Act for
purposes of the Regulatory Flexibility Act.

(a) General. For purposes of Commission rulemaking in accordance
with the provisions of Chapter Six of the Administrative Procedure Act
(5 U.S.C. 601 et seq.) and unless otherwise defined for purposes of a
particular rulemaking, the term small business or small organization
for purposes of the Investment Company Act of 1940 shall mean an
investment company that, together with other investment companies in
the same family of investment companies, has net assets of $10 billion
or less as of the end of its most recent fiscal year, or, following
[DATE TEN YEARS AFTER EFFECTIVE DATE OF FINAL RULE], the dollar amount
specified in the most recent order issued by the Commission in
accordance with paragraph (c) of this section and as published in the
Federal Register. For purposes of this section, family of investment
companies has the same meaning and conditions as in Item B.5. of Form
N-CEN.
(b) Determination of net assets. The Commission may calculate its
determination of the net assets of a family of investment companies
based on the net assets of each investment company in the family of
investment companies as of the end of such company's fiscal year.
(c) Future inflation adjustments. The dollar amount specified in
paragraph (a) of this section shall be adjusted by order of the
Commission, issued on or about [DATE TEN YEARS AFTER EFFECTIVE DATE OF
FINAL RULE], and approximately every ten years thereafter. The adjusted
dollar amount established in such orders shall be computed by:
(1) Dividing the year-end value of the Personal Consumption
Expenditures Chain-Type Price Index (or any successor index thereto),
as published by the United States Department of Commerce, for the
calendar year preceding the calendar year in which the order is being
issued, by the year-end value of such index (or successor) for the
calendar year [YEAR OF EFFECTIVE DATE OF FINAL RULE]; and
(2) Multiplying $10 billion times the quotient obtained in
paragraph (c)(1) of this section and rounding the product to the
nearest multiple of $1 billion.

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

0
3. The authority citation for part 275 continues to read, in part, as
follows:

Authority: 15 U.S.C. 80b-2(a)(11)(G), 80b-2(a)(11)(H), 80b-
2(a)(17), 80b-3, 80b-4, 80b-4a, 80b-6(4), 80b-6a, 80b-11,
1681w(a)(1), 6801-6809, and 6825, unless otherwise noted.
* * * * *
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4. Amend Sec. 275.0-7 by revising paragraph (a) and adding new
paragraph (c).
The revisions read as follows:

Sec. 275.0-7 Small entities under the Investment Advisers Act for
purposes of the Regulatory Flexibility Act.

(a) For purposes of Commission rulemaking in accordance with the
provisions of Chapter Six of the Administrative Procedure Act (5 U.S.C.
601 et seq.) and unless otherwise defined for purposes of a particular
rulemaking proceeding, the term small business or small organization
for purposes of the Investment Advisers Act of 1940 shall mean an
investment adviser that:
(1) Has assets under management, as defined under Section
203A(a)(3) of the Act (15 U.S.C. 80b-3a(a)(2)) and reported on its
annual updating amendment to Form ADV (17 CFR 279.1), of less than $1
billion, or, following [DATE TEN YEARS AFTER EFFECTIVE DATE OF FINAL
RULE], the dollar amount specified in the most recent order issued by
the Commission in accordance with paragraph (c) of this section and as
published in the Federal Register;
(2) Did not have total assets of $5 million or more on the last day
of the most recent fiscal year, or, following [DATE TEN YEARS AFTER
EFFECTIVE DATE OF FINAL RULE], did not have total assets equal to or
greater than on the last day of the most recent fiscal year the dollar
amount specified in the most recent order issued by the Commission in
accordance with paragraph (c) of this section and as published in the
Federal Register; and
(3) Does not control, is not controlled by, and is not under common
control with another investment adviser that has assets under
management of $1 billion 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, or following [DATE TEN YEARS AFTER
EFFECTIVE DATE OF FINAL RULE], does not control, is not controlled by,
and is not under common control with another investment adviser that
has assets under management equal to or greater than the dollar amount
specified in the most recent order issued by the Commission in
accordance with paragraph (c) of this section and as published in the
Federal Register, or

[[Page 1129]]

any person (other than a natural person) that had total assets equal to
or greater than the dollar amount specified in the most recent order
issued by the Commission in accordance with paragraph (c) of this
section and as published in the Federal Register;
* * * * *
(c) The dollar amounts specified in paragraph (a) of this section
shall be adjusted by order of the Commission, issued on or about [DATE
TEN YEARS AFTER EFFECTIVE DATE OF FINAL RULE], and approximately every
ten years thereafter. The adjusted dollar amounts established in such
orders shall be computed by:
(1) For purposes of paragraph (a)(1) and determining assets under
management for purposes of paragraph (a)(3),
(i) Dividing the year-end value of the Personal Consumption
Expenditures Chain-Type Price Index (or any successor index thereto),
as published by the United States Department of Commerce, for the
calendar year preceding the calendar year in which the order is being
issued, by the year-end value of such index (or successor) for the
calendar year [YEAR OF EFFECTIVE DATE OF FINAL RULE]; and
(ii) Multiplying $1 billion times the quotient obtained in
paragraph (c)(1)(i) of this section and rounding the product to the
nearest multiple of $100 million; and
(2) For purposes of paragraph (a)(2) and determining total assets
for purposes of paragraph (a)(3),
(i) Dividing the year-end value of the Personal Consumption
Expenditures Chain-Type Price Index (or any successor index thereto),
as published by the United States Department of Commerce, for the
calendar year preceding the calendar year in which the order is being
issued, by the year-end value of such index (or successor) for the
calendar year [YEAR OF EFFECTIVE DATE OF FINAL RULE]; and
(ii) Multiplying $5 million times the quotient obtained in
paragraph (c)(2)(i) of this section and rounding the product to the
nearest multiple of $500,000.
* * * * *
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5. Amend Sec. 275.203-3 by revising paragraph (b).
The revisions read as follows:

Sec. 275.203-3 Hardship exemptions.

* * * * *
(b) Continuing hardship exemption--
(1) Eligibility for exemption. If you are a ``small business'' or
``small organization'' (as described in paragraph (b)(5) of this
section), you may apply for a continuing hardship exemption.
The period of the exemption may be no longer than one year after
the date on which you apply for the exemption.
* * * * *
(5) Small business or small organization. You are a ``small
business'' or ``small organization'' for purposes of this section if
you are required to answer Item 12 of Form ADV (17 CFR 279.1) and
checked ``no'' to each question in Item 12 that you were required to
answer.

PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF
1940

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6. The authority citation for part 279 continues to read as follows:

Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-1,
et seq., Pub. L. 111-203, 124 Stat. 1376.
* * * * *
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7. Amend Form ADV (referenced in Sec. 279.1) by:
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a. In the General Instructions, revising the second bullet point
paragraph of Instruction 17 related to continuing hardship exemptions;
and
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b. In Part 1A, revising Item 12.

Note: Form ADV is attached as Appendix A to this document. The
text of Form ADV does not, and this amendment will not, appear in
the Code of Federal Regulations.

By the Commission.

Dated: January 7, 2026.
J. Matthew DeLesDernier,
Deputy Secretary.

Note: The following appendix will not appear in the Code of
Federal Regulations.

Appendix A

Form ADV (Paper Version)

Uniform Application for Investment Adviser Registration and Report by
Exempt Reporting Advisers

Form ADV General Instructions

* * * * *
17. What if I am not able to file electronically?
If you are required to file electronically but cannot do so, you
may be eligible for one of two types of hardship exemptions from the
electronic filing requirements.
* * * * *
<bullet> A continuing hardship exemption may be granted if you
are a small business or small organization and you can demonstrate
that filing electronically would impose an undue hardship. You are a
small business or small organization, and may be eligible for a
continuing hardship exemption, if you are required to answer Item 12
of Part 1A and you are able to respond ``no'' to each question in
Item 12. See SEC rule 0-7.
If you have been granted a continuing hardship exemption, you
must complete and submit the paper version of Form ADV to FINRA.
FINRA will enter your responses into the IARD. As discussed in
General Instruction 16, FINRA will charge you a fee to reimburse it
for the expense of data entry.
* * * * *

Part 1A

* * * * *

Item 12 Small Businesses

The SEC is required by the Regulatory Flexibility Act to
consider the effect of its regulations on small entities. In order
to do this, we need to determine whether you meet the definition of
``small business'' or ``small organization'' under rule 0-7. You are
a ``small business'' or ``small organization'' under rule 0-7 if you
have regulatory assets under management of less than $1 billion and
you answer ``no'' to each question in A., B., and C. below. Each of
these thresholds is updated every [TEN YEARS AFTER EFFECTIVE DATE OF
FINAL RULE] for inflation in accordance with rule 0-7(c). The
thresholds described in this item will be updated accordingly when
the thresholds in rule 0-7 are inflation adjusted.
Answer this Item 12 only if you are registered or registering
with the SEC and you indicated in response to Item 5.F.(2)(c) that
you have regulatory assets under management of less than $1 billion.
You are not required to answer this Item 12 if you are filing for
initial registration as a state adviser, amending a current state
registration, or switching from SEC to state registration.
For purposes of this Item 12 only:
<bullet> Total Assets refers to the total assets of a firm,
rather than the assets managed on behalf of clients. In determining
your or another person's total assets, you may use the total assets
shown on a current balance sheet (but use total assets reported on a
consolidated balance sheet with subsidiaries included, if that
amount is larger).
<bullet> Control means the power to direct or cause the
direction of the management or policies of a person, whether through
ownership of securities, by contract, or otherwise. Any person that
directly or indirectly has the right to vote 25 percent or more of
the voting securities, or is entitled to 25 percent or more of the
profits, of another person is presumed to control the other person.

Yes No

A. Did you have total assets of $5 million or more on the last day of your most recent [ballot] [ballot]
fiscal year?
If ``yes,'' you do not need to answer Items 12.B. and 12.C.

[[Page 1130]]

B. Do you:
(1) control another investment adviser that had regulatory assets under management [ballot] [ballot]
(calculated in response to Item 5.F.(2)(c) of Form ADV) of $1 billion or more on the
last day of its most recent fiscal year?
(2) control another person (other than a natural person) that had total assets of $5 [ballot] [ballot]
million or more on the last day of its most recent fiscal year?
C. Are you:
(1) controlled by or under common control with another investment adviser that had [ballot] [ballot]
regulatory assets under management (calculated in response to Item 5.F.(2)(c) of Form
ADV) of $1 billion or more on the last day of its most recent fiscal year?
(2) controlled by or under common control with another person (other than a natural [ballot] [ballot]
person) that had total assets of $5 million or more on the last day of its most recent
fiscal year?

* * * * *
[FR Doc. 2026-00316 Filed 1-9-26; 8:45 am]
BILLING CODE 8011-01-P

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