In a follow-up to Securities and Exchange Commission (SEC) Chair Paul Atkins’s May 2025 announcement on expanding retail investor access to private fund strategies, the SEC’s Division of Investment Management has now issued Accounting and Disclosure Information (ADI) 2025-16, providing formal guidance for registered closed-end funds that invest in private funds (CE-FOPFs).
As noted in our prior advisory, this guidance is part of a shift from informal staff positions taken before May. Previously, registered closed-end funds were generally prohibited from investing more than 15% of their assets in private funds unless they imposed a minimum investment requirement of $25,000 and restricted sales to accredited investors. The SEC’s new ADI confirms the revised stance that the SEC will no longer request limitations on:
- Investor eligibility (e.g., accredited investor status).
- Minimum investment thresholds.
- Exposure to private funds (e.g., 15% cap).
In its new, formal, guidance, the SEC also outlines the kinds of disclosures that it will be looking for CE-FOPFs to include in their registration statements to promote retail investor understanding of CE-FOPFs in making informed investment decisions. The SEC’s guidance emphasizes the following points:
- Clarity and Compliance. CE-FOPF registration statements must be clear, concise, and written in plain English to help retail investors make informed decisions, in line with SEC requirements.
- Comprehensive Disclosure Requirements. Funds must disclose all required information under Form N-2, including costs, strategies, risks, and due diligence practices related to private fund investments.
- Fee and Performance Transparency. CE-FOPFs should both explain how underlying private fund fees, especially performance-based fees, impact overall returns and disclose risks like “netting risk,” where fees may be earned despite negative performance.
- Insight into Underlying Funds. Disclosures should detail the types of private funds invested in and their strategies, speculative risks, conflicts of interest, and liquidity characteristics.
- Regulatory and Information Limitations. CE-FOPFs must disclose that underlying private funds are not bound by the Investment Advisers Act of 1940 and may use leverage or affiliated transactions that would otherwise be prohibited by the Investment Company Act, and that investors may have limited visibility into these funds’ holdings and valuations.
- Additional Risk Factors. Where relevant, CE-FOPFs should disclose risks related to legal jurisdictions, liquidity restrictions (e.g., redemption limits, payment in kind), and tax issues that could affect the CE-FOPFs’ regulated investment company status under the Internal Revenue Code.
The formal guidance effectively codifies greater flexibility for retail closed-end funds to invest in private funds. It also aligns with the SEC’s broader initiative to responsibly expand retail access to alternative investment strategies. We expect that the guidance and related initiatives will lead to increased proliferation of retail closed-end funds that focus on alternative strategies.
If you have any questions, or would like additional information, please contact one of the attorneys on our Investment Funds team.
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