Updating What “Small” Means in Today’s Asset Management Industry
In 1982, the asset management industry landscape looked very different. ETFs didn’t exist, most work was done without modern technology, and most people would be lucky to have a beeper, much less a smartphone. While much has changed in the decades since, the SEC’s narrow definitions for small entities have remained virtually unchanged.
Today, those definitions capture less than 1% of funds and less than 3% of advisers. The SEC is required to consider the impact of its rules on small entities, and the current definitions of what “small” means no longer reflect today’s asset management landscape or the diversity of fund complexes and advisers operating within it. The SEC’s recent rule proposal to modernize the definitions of small funds and small advisers is a large and welcome step forward.
Comparing the SEC’s Current Rules With the Proposed Rules
| SEC’s Current Small Entity Definition | SEC’s Proposed Small Entity Definition | |
| Small Fund Complex Threshold | $50 million AUM | $10 billion AUM |
| Small Adviser Threshold | $25 million AUM | $1 billion AUM |
| Automatic Threshold Adjustments | None | Ten-year automatic adjustments to the rules’ asset-based thresholds |
The proposal would significantly expand the number of funds and advisers that are considered small and would allow the SEC to better analyze future rule proposals’ impacts on small entities. The number of eligible funds and advisers would increase by roughly 200-fold. More importantly, the benefits to these entities in future rulemakings—which could include additional compliance time and tailored or flexible compliance requirements—would be meaningful.
What This Means for Smaller Funds
Compared to larger complexes, smaller fund complexes and advisers tend to operate with more streamlined staffing and technology resources, which can affect both scale and bargaining position with third-party service providers.
As a result, compliance costs often take up a much larger share of their assets. The difference in scale is stark: the average size of an actively managed equity fund at small complexes is about $333 million, compared with an average of about $3.4 billion at larger firms, allowing larger complexes to spread fixed costs across a much broader base.
The Pressures Facing Smaller Funds
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Fixed compliance costs spread across fewer assets, leading to higher expense ratios and pressure on net returns
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Structural scale advantages that favor larger complexes
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A cumulative wave of regulatory requirements that adds to ongoing costs and may not be properly calibrated for the risks such regulations look to mitigate
The result: smaller funds are disproportionately affected, competition narrows, and industry diversity declines.
Protecting a competitive environment where small businesses can compete fairly isn’t a new idea. Congress made it clear in the Regulatory Flexibility Act that regulators should consider how rules affect smaller entities and avoid placing disproportionate burdens on them. It reflects a common-sense reality: a fixed cost that barely registers for a large entity can be a meaningful expense for a smaller one—like asking a national chain and a neighborhood shop to absorb the same costs.
Protecting Competition and Investor Choice
Small entities play an important role in the broader asset management ecosystem. They contribute to competition, innovation, and investor choice—often offering specialized strategies and serving niche markets that larger firms may overlook.
They also play a meaningful role in local communities, supporting jobs, economic development, and investor engagement. In many cases, smaller firms provide more direct access to portfolio managers and senior leadership, fostering closer relationships with investors.
When regulatory burdens fall disproportionately on these firms, the impact goes beyond individual businesses. It can reduce competition, limit investor choice, and narrow the diversity of the asset management landscape.
Designing a Framework That Evolves with the Industry
We look forward to the proposal’s prompt adoption, and its tangible impacts on future rulemakings. By tailoring rule provisions where appropriate and extending compliance dates when it makes sense, the SEC can ensure small funds and advisers are not disproportionately harmed by compliance burdens and can remain competitive within the asset management landscape.