On September 30, 2026, the Securities and Exchange Commission (SEC) issued proposing releases designed to facilitate capital formation by expanding retail investor access to private market strategies through registered fund structures.
According to the SEC, the move is intended to address several longstanding regulatory barriers that have limited the ability of alternative and private market managers to offer investment products to retail investors through registered fund vehicles. SEC Chair Paul Atkins described the initiative as advancing “responsible retailization”—an effort to promote investment growth and innovation across asset classes while maintaining safeguards for individual investors.
Modernizing Performance-Based Compensation
A central component of the rulemaking package would modernize the rules governing performance-based compensation for investment advisers to funds registered under the Investment Company Act of 1940, including permitting registered funds to pay performance fees without requiring that the fund be sold only to high-net-worth investors.
Current regulatory framework
Section 205(a)(1) of the Investment Advisers Act of 1940 generally prohibits an SEC-registered investment adviser from entering into any advisory contract that provides for compensation based on a share of capital gains or capital appreciation of the funds of a client (e.g., carried interest or performance fees). An exception under Rule 205-3 permits performance-based compensation arrangements with qualified clients—currently individuals with a net worth exceeding approximately $2.7 million or accounts with at least $1.1 million under management with the adviser.
As a practical matter, registered funds may pay performance fees only if the fund is sold exclusively to qualified clients meeting these thresholds. Business development companies (BDCs) may pay performance fees without limiting their investors to qualified clients, but those fees generally may not exceed 20% of the BDC’s net realized gains, less unrealized losses, in any fiscal year.
These restrictions have deterred many alternative fund managers from launching retail registered fund products. Alternative managers are generally reluctant to offer products that do not incorporate performance-based fee structures because they would carry lower or differentiated fees from their flagship hedge fund or private equity fund offerings.
Removing the restrictions could fuel significant growth in publicly traded alternative funds, which offer investors secondary market liquidity and offer managers the prospect of managing “permanent capital.” The proposals could also lead to increased launches of interval and tender offer funds managed by firms that would otherwise not offer retail-oriented products without performance-based compensation.
Proposed changes
The proposed amendments would permit performance-based compensation arrangements for registered funds and BDCs, subject to three key conditions:
- 20% cap on net gains. Performance-based compensation could not exceed 20% of the registered fund’s net gains (whether realized or unrealized) over a specified period. This cap is intended to align with common private fund industry practice while ensuring that most investment returns accrue to fund shareholders. It would also apply to BDCs, replacing the 20% cap on net realized gains, less unrealized losses, provided the BDC adheres to the other conditions in the proposal. The proposed methodology more closely resembles how hedge fund managers typically calculate performance fees for private funds.
- Fund governance standards. A fund would need to satisfy the fund governance standards set forth in Investment Company Act Rule 0-1(a)(7). Those standards generally require a majority-independent board, independent legal counsel for the independent directors (to the extent they have separate counsel), an annual board self-assessment, and quarterly executive sessions of the independent directors. Many registered funds already follow these standards to rely on commonly used exemptive rules.
- Board approval and findings. A fund’s board of directors, including a majority of independent directors, would need to affirmatively determine that the performance-based compensation arrangement is in the best interests of the fund and its shareholders. The board also would need to make specific findings regarding the arrangement’s appropriateness, structure, and investor protection features. While this requirement places meaningful fiduciary oversight at the center of the performance fee determination, it is functionally equivalent to what is already required of fund boards and independent directors when evaluating and approving advisory agreements under Section 15(c) of the Investment Company Act.
In addition, the proposals would amend certain fund registration and reporting forms to require detailed disclosures of performance-based compensation, ensuring that investors receive clear and prominent information regarding the fee structure.
Revising the Qualified Client Definition
The proposed amendments would also revise the “qualified client” definition under Rule 205-3 to include investors that meet the “accredited investor” definition in Regulation D under the Securities Act. The separate net worth and assets-under-management tests currently in the “qualified client” definition would be removed.
The “accredited investor” definition generally encompasses individuals with annual income exceeding $200,000 (or $300,000 jointly with a spouse) or a net worth exceeding $1 million, excluding the value of a primary residence. Aligning the “qualified client” threshold with the “accredited investor” standard would substantially lower the eligibility threshold for performance-based compensation, expanding the potential investor base for performance-fee-bearing fund products.
This change would allow registered investment advisers to expand investor access to private market strategies through separately managed accounts and other programs. It would also allow registered advisers to certain private funds, such as Section 3(c)(1) funds, to open those funds to a broader investor base.
The revised definition would not affect registered funds that would charge performance fees under the SEC’s performance-based compensation modernization proposal. Rather, it would affect unregistered products, such as Section 3(c)(1) funds and separately managed accounts, that charge performance fees. If adopted, the proposals would afford those products greater flexibility to market and sell to a broader group of investors.
Modernizing Interval Funds
The proposed amendments would also modernize the regulatory framework governing registered interval funds, which have become an increasingly important vehicle for providing retail investors with access to less liquid investment strategies.
Key elements of the interval fund modernization proposal include:
- Ability to offer liquidity at monthly periodic intervals. Monthly intervals, in addition to the quarterly and semiannual intervals currently available, may be particularly attractive for managers seeking to offer investors more frequent liquidity access while still maintaining the benefits of the interval fund structure. Currently, monthly repurchases are only available to interval funds through an application for an SEC exemptive order. The proposal would eliminate the need to obtain exemptive relief.
- Extended deferral of first repurchase offer. An extended deferral period before the first repurchase offer would better align the repurchase schedule with the investment timeline of less liquid strategies by providing managers with additional time to deploy capital before being required to offer liquidity.
- Principles-based liquidity approach. Current rules require that no repurchase offer be conducted unless the interval fund has an amount of liquid assets at least equal to the repurchase offer amount. The proposal would replace this requirement with a principles-based liquidity framework, allowing fund managers greater flexibility to manage portfolio liquidity in a manner consistent with a fund’s specific investment strategy and repurchase obligations.
- Simplified repurchase mechanics. The proposals would simplify and clarify how funds determine repurchase pricing dates and handle oversubscribed repurchase offers, reducing operational complexity for fund administrators.
- More frequent discretionary repurchases. The proposals would permit more frequent discretionary repurchases outside their regular intervals, providing fund managers with additional flexibility to offer liquidity when circumstances warrant. Currently, only one discretionary offer is permitted every two years.
More frequent repurchases could make interval funds more competitive with publicly traded funds by providing investors with additional liquidity options.
Expanding Multiple Share Classes for Closed-End Funds
The proposals would eliminate the need for closed-end funds to apply for SEC exemptive relief before issuing multiple classes of shares. Instead, the amendments would establish a rules-based exemptive framework, permitting closed-end funds to:
- Adopt multiple-share-class structures without obtaining individual exemptive relief from the SEC.
- Enter into arrangements with affiliates for the payment of asset-based distribution and service fees.
- Provide updated prospectus disclosures for multiple-share-class and master-feeder structures.
The SEC also proposes to rescind certain existing exemptive orders related to interval funds and multiple-share-class arrangements that would be superseded by the new rules-based framework.
Potential Expansion of the Accredited Investor Definition
In a separate but related action, the SEC is seeking comment on potential changes to the “accredited investor” definition that would recognize certain professional credentials and licenses as qualifying criteria. The designations under consideration include:
- U.S. Certified Public Accountant (CPA).
- Chartered Financial Analyst (CFA).
- Certified Financial Planner (CFP).
- Financial Industry Regulatory Authority (FINRA) Investment Banking Representative License (Series 79).
- FINRA Research Analyst License (Series 86 and Series 87).
The SEC is also seeking comment on whether passing an accredited investor examination developed by FINRA should qualify an individual as an accredited investor. This knowledge-based approach to accredited investor qualification would represent a departure from the traditional wealth-based criteria, although its scope and implementation details would remain subject to further rulemaking and guidance.
Practical Implications for Fund Managers and Advisers
If adopted as proposed, the amendments could have far-reaching implications for fund managers, investment advisers, and the broader asset management industry:
- New product development opportunities. Alternative managers that have been deterred from launching retail registered fund products because of performance-fee restrictions would have a new path to market. The ability to charge performance-based compensation could incentivize a new wave of registered fund launches offering private market and alternative strategies to a broader investor base.
- Distribution and intermediary relationships. The interval fund modernization and multiple-share-class expansion may open new distribution channels for fund products, particularly through wealth management platforms and intermediary networks that have historically favored more liquid or multiclass fund structures.
- Investor base expansion. Aligning the “qualified client” definition with the “accredited investor” standard, combined with the potential expansion of the accredited investor definition itself, could significantly broaden the eligible investor base for alternative fund products.
The complete proposals are available here:
Alston & Bird’s Investment Funds Group is monitoring these developments and is available to help with any questions about the proposed performance-fee framework, interval fund modernization, share-class expansion, or the evolving “accredited investor” definition.
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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