SEC Proposes to Expand Retailization of Private Markets

On September 30, 2026, the SEC proposed a series of rulemakings to “expand responsible retailization of private markets.” Taken as a whole, the proposals would expand the ability of registered investment advisers to receive compensation on the basis of a share of capital gains in or capital appreciation of an advisory client’s account (“performance-based compensation”), update the interval fund framework to allow more flexibility with respect to liquidity management, allow registered closed-end funds and business development companies (“BDCs”) to issue multiple share classes without an exemptive order, and expand methods for individual investors to qualify as accredited investors. Each of these components is described in more detail below.

Investment Adviser Performance-Based Compensation Modernization

The SEC issued a release that proposes amendments to Rule 205-3 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), which provides an exemption from the statutory prohibition on registered investment advisers receiving performance-based compensation. The amendments would expand the permissible receipt of performance-based compensation by advisers to registered investment companies and BDCs (“Regulated Funds”), subject to certain conditions.

Summary of Proposal:

The proposed amendments to Rule 205-3 would provide for expanded use of performance-based compensation by Regulated Funds pursuant to two potential avenues:

• First, the proposed amendments would allow a Regulated Fund to qualify as a “qualified client” and its adviser to charge performance-based compensation regardless of the Regulated Fund’s shareholder base if the following conditions are met:

• 20% cap. The performance-based compensation does not exceed 20% of the Regulated Fund’s net capital gains or net capital appreciation over a specified period or as of definite dates (with flexibility to define the period or dates in the advisory contract).

• Fund governance standards. The Regulated Fund’s board meets the fund governance standards in Rule 0-1(a)(7) under the Investment Company Act of 1940, as amended (the “1940 Act”).

• Board best-interest determination with written findings. The Regulated Fund’s board, including a majority of non-interested directors, determines that the fee is in the best interests of the Regulated Fund and its shareholders. This would be undertaken as part of the board’s initial and annual advisory contract review process under Section 15 of the 1940 Act. The determination must include written findings on:

• Appropriateness. Whether the arrangement is appropriate in light of factors such as the Regulated Fund’s investment strategy and valuation practices.

• Basis of calculation. How the fee is calculated, including the measurement period and whether it is based on realized gains, unrealized gains, or both.

• Investor protection features. Whether shareholders are adequately protected through, for example, features such as preferred returns or hurdles, high-water marks, or loss carryforwards.

• Second, the proposed amendments would allow a Regulated Fund to qualify as a “qualified client” and its adviser to charge performance-based compensation if each of the Regulated Fund’s shareholders meets an expanded qualified client definition that would eliminate the current net worth and assets under management tests and add any natural person or company the adviser reasonably believes is either an “accredited investor” pursuant to Regulation D under the Securities Act of 1933, as amended, or a qualified purchaser as defined in Section 2(a)(51)(A) of the 1940 Act.

The proposal would amend Forms N-1A, N-2, and N-CSR to require certain disclosures of performance-based compensation by Regulated Funds that use such fees.

Additional Notes:

Impacted Regulated Funds

• The proposed rule would be a material change for registered investment companies and incrementally helpful for BDCs.

• Currently, advisers to BDCs are permitted to charge performance-based fees not to exceed 20% of realized capital gains over a specified period or definite dates (computed net of all realized capital losses and unrealized capital depreciation). The proposal would retain the 20% cap but allow the fees to be based on realized and unrealized gains, provided that the conditions in the rule are met. As such, if the amendments are adopted as proposed, investment advisers to BDCs would have two options relating to performance-based compensation: (1) relying on the existing realized-gains-only exception within Section 205(b)(3) of the Advisers Act, or (2) relying on amended Rule 205-3 with the broader fee base (realized and unrealized gains) but with additional governance, findings, and disclosure conditions.

• The performance-based compensation proposal applies to open-end and closed-end registered investment companies.

• The SEC indicated that it anticipates that performance-based compensation would be more likely to be employed by closed-end registered investment companies, but the proposed rule does not preclude employment by open-end registered investment companies. The SEC noted, however, that performance-based compensation likely would be inappropriate for certain types of existing registered investment companies (e.g., registered investment companies that track indices).

• Unit investment trusts (“UITs”) and separate accounts offering variable annuity contracts on Form N-3 are outside the proposed scope of the rulemaking. UITs are excluded because they are organized under a trust indenture or similar instrument and lack a board of directors or other governing body capable of the ongoing oversight on which the release is premised.

Implementation and Board Considerations

• Existing Regulated Funds seeking to adopt performance-based compensation generally would need to obtain shareholder approval of the amended advisory contract pursuant to Section 15(a) of the 1940 Act.

• The SEC noted in the release that it does not expect existing Regulated Funds to be a significant channel for these changes and expects that, instead, most Regulated Funds using performance-based compensation pursuant to the Rule 205-3 amendments would be new Regulated Funds.

• Because performance-based compensation would be a component of total advisory compensation, the release observes that such compensation necessarily falls within the board’s obligations under Section 15(c) and within the adviser’s fiduciary duty under Section 36(b) of the 1940 Act.

• The release states that the required findings are not simply a restatement of Sections 15(c) and 36(b), however. Instead, the proposed Rule 205-3 conditions relating to performance-based compensation “are designed to operate independently of, and in addition to, the board’s existing statutory duties, by requiring findings that are more particularized to the specific features of the performance fee arrangement.”

• If no investor protection features are included in the performance-based compensation arrangement, the proposed amendments would require that the board’s determination “include written findings that address the basis for concluding that the compensation arrangement is adequate to protect the interests of shareholders without such investor protection features.”
• With respect to the measurement period of performance-based compensation, the release states that a board’s findings should reflect a considered, holistic assessment of whether the period, viewed in the context of the overall fee arrangement (including other investor protection features that are incorporated into the fee arrangement, some of which could mitigate risks associated with shorter measurement periods), is appropriate for the Regulated Fund.

Disclosure

• The proposed disclosure amendments are broader in scope than the newly proposed exemption for performance-based compensation – i.e., the disclosure amendments would be applicable to performance fees based on any performance measure, including interest, ordinary income, and dividends, as well as fulcrum fees, and not solely fees based on capital gains or appreciation. The amendments would, therefore, apply to BDCs with existing realized capital gains-based fees and Regulated Funds with existing income-based incentive fees (including many BDCs and private credit-focused interval and tender offer funds) irrespective of reliance on the proposed rule.
• Any changes to the disclosure requirements for fees also will impact the disclosure provided to 401(k) plan participants. As 401(k) sponsors evaluate investment options, they will need to consider performance and other fee and expense information in a way that enables appropriate comparisons between Regulated Funds and non-Regulated Funds.
• The release proposes a 12-month compliance period for the amendments to Form N-1A, N-2, and N-CSR. However, an adviser to a Regulated Fund relying on the first avenue described above to charge a performance-based fee (compliance with the 20% cap, fund governance, and board findings requirements) would be required to comply with the amended Forms at the time it initially relies on the amended rule’s provisions.

Interval Fund Modernization; Expansion of Multiple Share Class to Registered Closed-End Management Investment Companies and BDCs

The SEC separately proposed amendments to applicable rules under the 1940 Act in order to modernize the interval fund framework and permit closed-end funds to issue multiple classes of shares.

Summary of Proposals:

Interval Fund Modernization. The SEC proposed amendments to Rule 23c-3 under the 1940 Act to allow interval funds to better match the liquidity profile of their underlying assets within the operational infrastructure and investor protection framework of the 1940 Act. Specifically, the SEC proposed amendments to Rule 23c-3 to permit each of the following:

• Deferral of an interval fund’s initial repurchase offer to up to two years, regardless of the length of the fund’s periodic interval thereafter;
• More frequent discretionary repurchases (i.e., changing Rule 23c-3(c) under the 1940 Act to allow discretionary repurchases from once every two years to once a year);
• Monthly periodic intervals (i.e., in addition to the current options for three-, six-, and 12-month intervals);
• Deduction of deferred sales loads from repurchase proceeds, provided that the deferred sales load is effected in compliance with Rule 6c-10; Rule 11a-3; and, to the extent that the deferred sales charge is waived, varied, or eliminated, Rule 22d-1 under the 1940 Act;
• Clarification of the process to determine the interval fund’s repurchase pricing date (to simplify the definition and to remove the current requirement to include the maximum number of days between the repurchase request deadline and the repurchase pricing date in the fund’s fundamental policies) and the treatment of oversubscribed repurchase offers (to clarify that pro rata repurchase requirements apply to when a fund has repurchased additional shares in an amount less than two percent of common stock outstanding); and
• Replacement of the requirements for an interval fund to hold a certain amount of liquidity with a principles-based liquidity approach.

• The amended approach would remove the requirement that an interval fund hold, between the notification date and repurchase pricing date of an offer, an amount equal to at least 100 percent of the repurchase offer amount in sufficiently liquid assets to meet the repurchase. Instead, a liquidity management provision would require the interval fund to manage its portfolio’s liquidity so that the fund can satisfy repurchase requests without requiring a sale or disposition of the fund’s portfolio investments at a price that deviates significantly from the value of those investments.

• The release states that policies and procedures to this effect would be required by Rule 38a-1 under the 1940 Act and provides preliminary guidance on what might be contemplated in such policies and procedures.

Multiple Share Classes for Closed-End Funds and BDCs. The SEC proposed amendments to Rules 18f-3 and 17d-3 under the 1940 Act to permit registered closed-end funds and BDCs to issue multiple share classes under conditions similar to those that apply to registered open-end funds. The SEC also proposed additional disclosure requirements regarding the use of multiple share classes.

• Currently, registered closed-end funds and BDCs must obtain SEC exemptive orders in order to issue multiple classes of shares. This amendment would effectively codify the relief and conditions in those orders.

• The conditions in the proposed amendment generally are modeled on the conditions set forth in the current version of Rule 18f-3 (which is applicable to open-end funds), including limitations on certain fee arrangements, class-specific voting rights, and the allocation of certain expenses.

• Unlike current exemptive orders, the proposed amendment would not require compliance with FINRA distribution fee rules (FINRA Rule 2341 in the case of registered closed-end funds; FINRA Rule 2310 in the case of BDCs) as a condition of the newly proposed relief, although those rules, pursuant to their terms, would continue to separately apply to relevant Regulated Funds (interval funds and publicly-offered BDCs).

Additional Notes:

• Portions of these proposals already have been approved by SEC staff through the exemptive application process (e.g., monthly periodic repurchases; multiple share classes of a closed-end fund). As with other rules stemming from work done by the Division of Investment Management in the last decade (e.g., Rule 6c-11), this rulemaking proposes to replace an exemptive application process with a generally applicable exemptive rule.
• The proposed interval fund modernization rule retains a five percent minimum repurchase requirement, even for those interval funds that are offering repurchases on a monthly basis. The SEC acknowledges in the release that at least one interval fund with a monthly repurchase interval has been permitted to make a repurchase offer for an amount of two percent (so long as it offers to repurchase no less than five percent of the aggregate of the interval fund’s shares as of the third month’s repurchase request deadline). Any fund so operating would, under the proposal, be required to start offering at least five percent per month under the proposed amendments.
• The proposals include certain conforming amendments to Forms N-2, N-CEN, and N-23c-3.
• In connection with these amendments, the SEC proposed to rescind certain existing exemptive orders. Funds that currently rely on exemptive relief will be eligible to rely on the new rulemaking at its effectiveness date, but there is a proposed one-year compliance period whereby a fund could rely on a to-be-rescinded order rather than the rule for that year.  If a fund voluntarily chooses to comply with the proposed rule prior to the compliance date, however, it would be required to adhere to all applicable requirements of the rule.
• The SEC noted that it was not proposing to rescind a recently granted order permitting multiple share class structures that include classes that trade on a securities exchange and in tokenized format using distributed ledger technology and further noted that applicants using similar “unique structures” should continue to request exemptive relief.

Accredited Investor Status

The SEC also has proposed amendments that would expand the accredited investor definition by including additional methods for investors to qualify as accredited investors – including the passing of an exam to be developed by FINRA and the holding of certain licenses, certifications, or other credentials (e.g., CPA, CFA, CFP, and certain FINRA licenses). Additional information regarding this development is available in a Ropes & Gray Viewpoints article here.

The public comment period for the interval fund modernization, multiple share class, and accredited investor proposals will be open until December 4, 2026. The public comment period for the investment adviser performance-based compensation proposal will be open until December 7, 2026.