On January 7, 2026, the Securities and Exchange Commission proposed amendments to how “small entities” are defined for investment advisers and investment companies under the Regulatory Flexibility Act (RFA).

At first glance, the proposal may appear technical. In practice, it reflects a broader shift in how the SEC is evaluating the real-world impact of regulation on smaller advisers.

This proposal does not reduce current compliance obligations. But it changes how the SEC must analyze who bears the burden of future rules.

Why the Regulatory Flexibility Act Matters to RIAs

The Regulatory Flexibility Act requires federal agencies to assess whether proposed rules would have a significant economic impact on a substantial number of small entities. When that threshold is met, agencies must consider alternative approaches that reduce unnecessary burden.

For RIAs, qualifying as a “small entity” under the RFA does not create exemptions from regulation. Instead, it affects:

• How compliance costs are analyzed
  
  
• Whether alternative implementation paths are considered
  
  
• How operational burden is weighed during rulemaking
  
  

Historically, relatively few SEC-registered advisers have qualified as “small entities” under the RFA. That has limited the Act’s practical influence on adviser-focused rulemaking.

The Structural Problem Behind the Proposal

For years, industry participants have argued that the SEC’s RFA framework relies too heavily on asset-based thresholds that no longer reflect how RIAs actually operate.

As a result:

• Firms with limited staff and infrastructure are treated as “large” for regulatory analysis
  
  
• Compliance burdens on smaller advisers are often underweighted
  
  
• Rulemaking analyses frequently conclude that new rules do not meaningfully impact small advisers
  
  

Asset size has become an increasingly poor proxy for compliance capacity.

Industry Context: IAA Petitions the SEC

This proposal does not emerge in a vacuum.

Prior to the January 2026 release, the Investment Adviser Association (IAA) formally petitioned the SEC to reconsider how it evaluates regulatory impact on smaller advisers. The IAA argued that:

• Asset-based definitions exclude many advisers that are operationally small
  
  
• Current thresholds distort cost-benefit analysis
  
  
• The RFA’s protections are effectively neutralized when too few advisers qualify as “small”
  
  

The IAA’s core position was that the SEC’s analytical framework has not kept pace with industry evolution and increasingly fails to capture the true compliance burden borne by smaller RIAs.

The SEC’s proposal directly addresses this critique at the definition level.

What the SEC Is Proposing

The proposed amendments focus on three key changes.

1. Higher Asset-Based Thresholds

The SEC would raise the asset thresholds used to determine whether an investment adviser or investment company qualifies as a small entity under the RFA.

If adopted, a significantly larger number of RIAs would fall within the scope of small-entity impact analysis when new rules are proposed.

This change affects analysis, not oversight. Registration status and exam authority remain unchanged.

2. Updated Asset Aggregation Rules

The proposal would revise how assets are aggregated across related funds or affiliated advisers when determining size.

This change is intended to better reflect actual firm scale and avoid overestimating compliance capacity based solely on affiliation structures.

3. Inflation Adjustments Every Ten Years

The SEC proposes to adjust asset thresholds for inflation every ten years by order.

This is designed to prevent the definitions from becoming outdated again and to preserve the RFA’s relevance over time.

What This Proposal Does Not Do

It is important to be precise about what this proposal does not change.

• It does not reduce existing compliance obligations
  
  
• It does not alter SEC or state registration thresholds
  
  
• It does not create safe harbors or exemptions
  
  
• It does not lower examination or enforcement expectations
  
  

This is a rulemaking framework update, not compliance relief.

Why This Matters for RIAs Going Forward

While indirect, the proposal has meaningful downstream implications.

A More Realistic Cost-Benefit Lens

If more advisers qualify as small entities, the SEC must conduct more rigorous analysis of how future rules affect smaller firms.

That may increase pressure to consider:

• Phased compliance timelines
  
  
• Scaled implementation expectations
  
  
• Alternative compliance approaches
  
  

Stronger Industry Positioning During Rulemaking

Industry groups and advisers will be on firmer ground when arguing that certain rules impose disproportionate burdens on smaller firms.

The IAA petition demonstrates that this type of structural engagement can influence how the SEC frames its analysis—even if outcomes take years.

What This Means for Smartria Clients

For Smartria’s core client base, the proposal reinforces several realities.

Recognition Without Relief

The SEC is signaling greater awareness of compliance burden on smaller RIAs, but expectations around documentation, supervision, and governance remain high.

Compliance Efficiency Still Matters

Firms that can demonstrate:

• Clear ownership of regulatory obligations
  
  
• Consistent, repeatable workflows
  
  
• Strong documentation and audit trails
  
  

will be better positioned regardless of how future rules are tailored.

Exam Readiness Is Unchanged

Examinations will continue to focus on:

• Supervisory consistency
  
  
• Evidence quality
  
  
• Timely escalation and remediation
  
  

The proposal does not change how exams are conducted today.

Smartria Takeaway

The SEC’s proposal to modernize “small entity” definitions under the Regulatory Flexibility Act reflects concerns long raised by industry groups, including the Investment Adviser Association.

While it does not reduce current obligations, it may shape how future adviser rules are designed, justified, and implemented.

RIAs that invest now in scalable, well-documented compliance infrastructure will be best positioned as regulatory expectations continue to evolve.

What to Watch Next

• Publication of the proposing release in the Federal Register
  
  
• Opening of the 60-day public comment period
  
  
• Comment letters from industry groups and stakeholders
  
  
• Whether the proposal is finalized ahead of additional adviser-focused rulemaking