US$10 billion is now a small company says SEC as it proposes a change to Investment Company Act thresholds.
The US Securities and Exchange Commission (SEC) has proposed a drastic change to the definition of a ‘small entity’, raising the assets under management threshold from US$50 million to US$10 billion.
Proposed amendments to Rule 0-10 of the Investment Company Act would change the analyses that the Commission would have to conduct under the Regulatory Flexibility Act (RFA).
The regulation was initially introduced in recognition of the fact that smaller entities would be less able to bear regulatory costs than their peers with lower expense ratios.
However, the SEC notes that the landscape has changed significantly since the US$50 million threshold was introduced in 1982.
“In 1982, investment companies held $296.7 billion in net assets among 857 funds. By the adoption of the 1998 amendments this had grown to $5.7 trillion among 7,829 funds, with holdings of $41.6 trillion among 13,630 funds by 2024,” it stated.
As a result of this growth, the proportion of investment companies deemed as “small entities” has gone from 62.4% to 0.6%.
Increased concentration of assets in large fund complexes, a wider range of fund strategies and lower expense ratios across open-ended funds have also altered the landscape, the regulator stated, suggesting that a new threshold should be introduced.
“We are 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”
The US$10 billion threshold would capture approximately 80% of fund families (previously referred to as groups of related investment companies)’, with 22.9% of individual funds – holding approximately 2.13% of total net assets – categorised as small entities.
Inflation-based adjustments to the asset-based thresholds would be made every decade under the proposed change.
The SEC is receiving comments on its proposals until 8 March, 60 days after the proposal was published in the Federal Register.
