SEC Proposes Amendments to Expand ‘Responsible Retailization’ of Private Markets

The proposed amendments would (1) permit advisers to charge performance fees to regulated funds and broaden the “qualified client” definition and (2) modernize the interval fund rule and permit regulated closed-end funds to offer multiple share classes without seeking exemptive relief. The SEC also issued five notices seeking comment on new ways for individuals to qualify as accredited investors. None of these proposals is final. Comments on the interval fund and multiple share class proposal and on the accredited investor notices are due December 4, 2026, and comments on the performance fee proposal are due December 7, 2026.

Background

The proposed amendments are the latest steps in SEC Chairman Paul S. Atkins’ “responsible retailization” agenda and build on President Trump’s August 7, 2025, executive order on alternative assets in 401(k) plans (Executive Order 14330, “Democratizing Access to Alternative Assets for 401(k) Investors”). The SEC’s premise is straightforward: because performance fees have been largely confined to private funds, access to those strategies “has been limited to a narrow group of eligible investors.” Permitting similar incentives for regulated fund advisers is intended to encourage sponsors to bring private market strategies and investment opportunities to retail investors.

Performance Fees and Qualified Clients

Section 205(a)(1) of the Investment Advisers Act of 1940 (Advisers Act) generally prohibits registered investment advisers from earning compensation based on a share of capital gains or capital appreciation of a client’s funds, subject to certain exceptions and exemptions (such as restricting their entire investor base to qualified clients under Rule 205-3). The proposal would amend Rule 205-3 under the Advisers Act to permit an adviser to a regulated fund to receive performance-based compensation calculated on the fund’s capital gains or capital appreciation (realized and unrealized), whether or not all of the fund’s investors are qualified clients, if:

• The fee does not exceed 20% of the fund’s net capital gains or net capital appreciation over a specified period or as of defined dates.
• The fund satisfies the fund governance standards of Rule 0-1(a)(7) under the Investment Company Act of 1940 (1940 Act).
• The fund’s board, including a majority of independent directors, finds the arrangement is in the best interest of the fund and its shareholders, with specific findings on its “appropriateness, structure, and investor protection features.”

Funds would also need to disclose performance fees in their registration and reporting forms. 

Most notably for private fund managers, the proposal would further broaden the “qualified client” definition in Rule 205-3(d)(1) under the Advisers Act to include any “accredited investor” as defined in Rule 501(a) of Regulation D under the Securities Act of 1933 (Securities Act), eliminating the separate net worth and assets-under-management tests currently in place.

Interval Funds and Multiple Share Classes

The proposed amendments to Rule 23c-3 under the 1940 Act would give interval funds more flexibility, including by:

• Extending the deferral of a fund’s first repurchase offer to up to two years after registration (or the shareholder vote adopting its fundamental repurchase policy).
• Permitting monthly repurchase intervals and more frequent discretionary repurchases.
• Replacing the prescriptive liquidity requirement with a principles-based approach during repurchase offer periods (to better match fund liquidity procedures to portfolios of illiquid assets).

Separately, the proposed amendments would also permit regulated closed-end funds to implement multiple share class structures and enter into arrangements for asset-based distribution and service fees under a rules-based framework without seeking individual exemptive orders. Most prior exemptive orders would be rescinded if adopted.

Potential New Accredited Investor Pathways

The SEC is also seeking comment on potential expansions of the “accredited investor” definition in Rule 501(a) of Regulation D under the Securities Act, specifically whether additional professional certifications, designations, and credentials should be recognized under Rule 501(a)(10) as pathways for individual qualification, such as:

• A Certified Public Accountant license, a Chartered Financial Analyst charter, or a Certified Financial Planner certification held in good standing.
• FINRA Series 79 (Investment Banking Representative) and Series 86/87 (Research Analyst) licenses.
• Passage of a new FINRA-developed accredited investor exam, which would confer status for 10 years.

Because the proposed qualified client definition would include all accredited investors, any new accredited investor pathways would also expand the pool of investors who can be charged performance fees.

Key Takeaways

Current rules remain in effect unless and until any final amendments are adopted and become effective. If adopted as proposed, the amendments would:

• Broaden Product Options: Make regulated funds more practical vehicles for private market strategies, including through performance fees, more flexible interval fund repurchases, and multiple share classes without exemptive relief.
• Expand Investor Eligibility: Allow advisers to charge performance fees to any accredited investor, a pool that could grow further if the SEC adds new accredited investor pathways.

ArentFox Schiff Corporate & Securities attorneys are available to answer your questions, including evaluating the impact of the proposals on your fund products. Please contact the authors of this alert or your ArentFox Schiff attorney contact for more information.