Executive Summary
- What’s new: On September 30, 2026, the SEC issued two proposed amendments designed to expand retail investor access and facilitate capital formation in the public and private markets, and also requested comment on potential expansions of the “Accredited Investor” definition.
- Why it matters: The proposals would let investment advisers to registered investment companies, including mutual funds, exchange-traded funds, closed-end funds and business development companies, earn performance-based compensation. They would also modernize the interval fund structure and permit multiple share classes without the need to obtain exemptive relief.
- What to do next: Market participants should consider offering comments on the two proposed amendments and the five accredited investor notices, with comment periods for all open for 60 days after their publication in the Federal Register.
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On September 30, 2026, the U.S. Securities and Exchange Commission (SEC) issued two proposed amendments designed to expand retail investor access and facilitate capital formation in the public and private markets. Comment periods for both proposals are open for 60 days after publication in the Federal Register. The proposals reflect and maintain a broader trend initiated by the SEC to reduce unnecessary regulatory obstacles to investment product innovation. In a separate but related step, the SEC also requested comments on potential expansions of the definition of “Accredited Investor.”
They are the latest in a series of actions taken by the SEC aimed at expanding retail investor access to private market strategies through regulated fund vehicles.
Overview of the Proposals
The first proposal, “Investment Adviser Performance-Based Compensation Modernization” (Release No. 33-11443), would amend Rule 205-3 under the Investment Advisers Act of 1940 (Advisers Act) to permit investment advisers to registered investment companies, including mutual funds, exchange-traded funds, closed-end funds and business development companies (BDCs), to earn performance-based compensation calculated on the basis of capital gains or capital appreciation — a fee structure historically associated with private funds. The proposal would also expand the definition of “qualified client,” from whom an adviser can earn performance fees, to include accredited investors under Regulation D, while eliminating the existing net worth and assets-under-management tests of the qualified client definition.
The second proposal, “Interval Fund Modernization; Expansion of Multiple Share Class to Registered Closed-End Management Investment Companies and Business Development Companies” (Release No. 33-11444), would amend rules under the Investment Company Act of 1940 (1940 Act) to modernize the interval fund structure, including by permitting monthly periodic intervals, extending the permitted deferral of the first repurchase offer, increasing the frequency of discretionary repurchase offers, modifying portfolio liquidity management requirements and permitting certain closed-end funds and BDCs to issue multiple classes of shares without the need to obtain exemptive relief from the SEC.
Proposed Rule: Investment Adviser Performance-Based Compensation Modernization
Section 205(a)(1) of the Advisers Act generally prohibits a registered investment adviser from earning compensation based on a share of capital gains on or capital appreciation of a client’s funds, subject to statutory exceptions and SEC exemptions. The principal exemption is Rule 205-3 under the Advisers Act, which permits performance fees for qualified clients.
Expansion of the Ability of Investment Advisers to Charge Performance-Based Compensation to Registered Investment Companies and BDCs
Currently, in order for an investment adviser to a registered fund or BDC relying on Rule 205-3 to earn a performance fee based on a share of capital gains or capital appreciation, the fund must restrict its entire investor base to qualified clients.
The proposed amendment would provide that a registered fund or BDC would be a qualified client if each of its equity owners is a qualified client or, alternatively, if the fund satisfies each of the following conditions:
- The performance fee does not exceed 20% of the fund’s net capital gains or net capital appreciation (realized and unrealized) over a specified period or as of definite dates.
- The fund satisfies the fund governance standards of Rule 0-1(a)(7) under the 1940 Act.
- As part of the annual Section 15(c) advisory contract review, the fund’s board, including a majority of the independent directors, determines that the performance fee arrangement is in the best interests of the fund and its shareholders, with written findings addressing (1) its appropriateness in light of the fund’s investment strategy and valuation practices, (2) the basis of calculation, including the measurement period and whether it covers realized gains, unrealized gains or both, and (3) the adequacy of investor protection features such as hurdle rates or preferred returns, high-water marks or loss carryforwards, or if there are no such features, the basis for concluding that the arrangement adequately protects shareholders.
Notably:
- The proposed rule would apply to all registered funds, including open-end funds (such as mutual funds and exchange-traded funds), closed-end funds (including listed funds, interval funds and tender offer funds) and BDCs (including listed and nontraded BDCs). Unit investment trusts (UITs) are excluded from the proposal because they are not overseen by a board of directors.
- Unlike Section 205(b)(3) of the Advisers Act, which provides a statutory exception for BDCs to pay performance fees on realized gains, the proposed rule would permit investment advisers to registered funds and BDCs to earn performances on both realized gains and unrealized gains or capital appreciation.
- With respect to the required board findings, the proposing release notes that the required findings are not simply a restatement of the board process already required by Sections 15(c) and 36(b) of the 1940 Act, are not intended to be redundant with those existing obligations and would require findings that are more particularized to the specific features of the performance fee arrangement. The basis for the board’s findings would be required to be disclosed by registered funds in the fund’s Form N-CSR filings.
- Prospectuses and periodic reports of funds that adopt performance fees would require additional disclosures, including a fee table line item regarding the performance fee, reflection of the performance fee in the expense example, and a detailed description of the performance fee arrangement, including a graphical representation illustrating the calculation of the performance fee across a range of hypothetical performance scenarios.
- The proposal would generally not apply to existing advisory agreements with funds entered into prior to the effective date of the final rule. An existing fund seeking to adopt a performance fee under the amended rule generally would be required to obtain shareholder approval of the new or amended advisory agreement.
Additional Amendments to the ‘Qualified Client’ Definition
The proposal would further broaden the definition of “qualified client” in Rule 205-3 under the Advisers Act. Currently, the definition covers natural persons and companies with at least $1.4 million under management with the adviser or a net worth over $2.7 million, “qualified purchasers” as defined under the 1940 Act and certain knowledgeable employees. The proposal would expand the definition by replacing the net worth and assets-under-management tests with the “accredited investor” standard (as defined in Regulation D under the Securities Act of 1933). These amendments are intended to harmonize the regulatory framework governing access to private funds by enabling advisers to funds that already limit their investors to accredited investors to enter into performance fee arrangements without needing to additionally limit investor eligibility by applying a separate qualified client standard.
Moreover, the proposal would also remove the current look-through provision in Rule 205-3(b), under which each equity owner of a Section 3(c)(1) fund or registered fund or BDC is treated as a “client” of the adviser. Instead, the definition would specify the conditions under which the fund itself is a qualified client, namely that each equity owner charged a performance fee is a qualified client. This change would not alter the provision’s ultimate function, but would reflect that, in the case of a fund client, an adviser’s “client” under the Advisers Act and the rules thereunder is the fund itself rather than the equity owners of the fund.
As a result, the expanded definition of qualified client would newly include:
- Natural persons or companies, other than Section 3(c)(1) private investment companies, that the adviser reasonably believes are accredited investors under Rule 501(a) when the contract is entered into.
- Registered funds and BDCs each of whose equity owners is a qualified client, such as an accredited investor.
- Registered funds and BDCs that satisfy the three conditions described above under “Expansion of the Ability of Investment Advisers to Charge Performance-Based Compensation to Registered Investment Companies and BDCs.”
- Section 3(c)(1) private funds, provided that each equity owner charged a performance fee on capital gains is itself a qualified client, such as an accredited investor.
Proposed Rule: Interval Fund Modernization; Expansion of Multiple Share Class to Registered Closed-End Management Investment Companies and Business Development Companies
Rule 23c-3 permits registered closed-end investment companies and BDCs to make periodic repurchase offers at net asset value (NAV) under a fundamental policy. The proposal would amend Rule 23c-3 to increase flexibility in the timing and structure of repurchase offers; replace the existing prescriptive portfolio liquidity requirement with a principles-based framework; extend the multiple share class regime of Rule 18f-3 and the affiliated distribution arrangement exemption of Rule 17d-3 to registered closed-end funds and BDCs; and update Form N-2 and Form N-CEN disclosure requirements.
Amendments to Rule 23c-3 to Modernize the Interval Fund Framework
Deferral of the First Repurchase Offer
The proposal would amend Rule 23c-3 to increase the permitted deferral period for an interval fund’s first repurchase offer. Currently, Rule 23c-3 requires an interval fund to set its first repurchase request deadline no later than two periodic intervals after the effective date of its registration statement (or the shareholder vote adopting the fundamental policy). For funds with quarterly intervals, this means the first offer must occur within six months; for semiannual funds, within one year. Only annual-interval funds currently have up to two years. The proposal would amend Rule 23c-3(a)(7) to permit all interval funds, regardless of interval length, to defer the first repurchase offer for up to two years after registration (or the shareholder vote adopting the fundamental policy). Funds may still begin repurchase offers earlier. A fund that subsequently changes its periodic interval would not receive a new deferral. The length of any deferral period would need to be disclosed in the fund’s prospectus. The extended deferral period is intended to provide an interval fund with additional time to more effectively “ramp up” and develop its long-term investment portfolio before being required to offer to repurchase shares and to better align the fund’s liquidity terms with the underlying asset classes targeted by its investment strategy.
Monthly Periodic Intervals
The proposal would add a monthly periodic interval option that codifies, with modifications, relief previously available only through individual exemptive orders. Currently, Rule 23c-3 limits periodic intervals to three, six or 12 months. The SEC has granted exemptive orders to certain funds permitting monthly repurchases, generally with a shortened notice window and, in some cases. The proposal would amend the definition of “periodic interval” in Rule 23c-3(a)(1) to include a one-month option, available to all interval funds without individual exemptive relief. Changing from one interval to another would still require a shareholder vote.
Interval Repurchase Notice Window
The proposal would also revise the shareholder notification window for all interval funds to 14 to 42 days before the repurchase request deadline from the current shareholder notification window of 21 to 42 days. Interval Repurchase Payment Deadline
The repurchase payment deadline would be amended to require payment at least one business day before notification of the next repurchase offer, ensuring that each repurchase cycle is completed before the next begins.
Repurchase Pricing Date
The proposal would simplify the definition of “repurchase pricing date” in Rule 23c-3(a)(5) and remove the requirement that the fund’s fundamental policy state the maximum number of calendar days between the repurchase request deadline and the pricing date. The existing 14-day maximum would be retained as a regulatory requirement but, once the limitation is removed from the fund’s fundamental policy, funds could adjust the timing of the pricing date within that window without a shareholder vote.
Deferred Sales Loads
The proposal would amend Rule 23c-3(b)(1) to permit the deduction of deferred sales loads from repurchase proceeds. Currently, only a repurchase fee of up to 2% may be deducted. The proposal would permit deferred sales load deductions if otherwise compliant as if the fund were an open-end fund. This provision is intended to place interval funds on the same footing as open-end funds with respect to sales load practices.
More Frequent Discretionary Repurchases
The proposal would increase the permitted frequency of discretionary repurchase offers. Currently, a closed-end fund or BDC may make a discretionary repurchase offer (i.e., an offer to all shareholders that is not made pursuant to a fundamental policy) no more than once every two years, measured from the last such offer. The proposal would reduce this restriction to once every 12 months. In addition, a conforming amendment would clarify that standard 5%-to-25% offer amount limits apply only to fundamental-policy offers; discretionary offers may be for any amount, codifying the SEC’s 1993 interpretation of the rule.
Rescission of Prior Orders
The proposed rule would rescind most prior individual orders, including orders permitting monthly repurchases with a 2% minimum. However, the proposed rule would not rescind the recently issued exemptive order that would permit multiple share class structures that include classes that trade on a securities exchange and in tokenized format using distributed ledger technology. (In the Matter of ARK Venture Fund and ARK Investment Management LLC, Investment Company Act Release No. 36308 (Aug. 24, 2026) (Notice) and Investment Company Act Release No. 36333 (Sep. 21, 2026) (Order).) The SEC requested comment on whether there are conditions that should be considered that would permit multi-class closed-end funds to issue a class of common shares that is traded on a secondary market, including whether such issues are ripe for broad-based consideration as part of a rule or should be explored in the exemptive application process before wide-spread adoption.
Modification of Interval Fund Liquidity Requirements During the Repurchase Offer Period
The proposal would replace the existing prescriptive liquidity requirement with a principles-based framework. Currently, Rule 23c-3(b)(10) requires an interval fund to hold at least 100% of the repurchase offer amount in assets that may be sold in the ordinary course of business at approximately their carrying value (or that mature by the repurchase payment deadline) from the date of shareholder notification through the repurchase pricing date. The fund’s board must adopt written liquidity procedures and take appropriate action to ensure compliance in the event of noncompliance. The proposal would remove the 100% quantitative asset test and instead require the fund to manage its portfolio liquidity so that it can satisfy repurchase requests without selling or disposing of portfolio investments at a price that deviates significantly from their value. Funds would be permitted to rely on multilayered liquidity sources, including cash inflows, portfolio cash flows, targeted dispositions, and credit facilities. This change would also apply to non-interval funds’ discretionary offers. According to the SEC, the shift to a principles-based approach is intended to make the interval fund structure more viable for strategies investing in less-liquid assets.
Rule for Multi-Class Closed-End Funds and BDCs
The proposal would extend the multiple share class framework of Rule 18f-3 to registered closed-end investment companies and BDCs. Rule 18f-3 permits registered open-end funds to issue multiple classes of shares; closed-end funds and BDCs currently may do so only pursuant to individual exemptive orders. The proposal would amend Rule 18f-3 to permit registered closed-end funds and BDCs to issue multiple share classes without an exemptive order. Funds would be required to satisfy the existing open-end fund conditions including but not limited to a written plan approved by the board (including a majority of independent directors) setting forth the share class arrangements and expense allocations, board findings that the multi-class plan, and any material amendment, is in the best interests of each class and the fund as a whole, class-specific expenses borne by that class, and satisfaction of the fund governance standards of Rule 0-1(a)(7). Additional closed-end-specific conditions would also be implemented, such as that common stock be continuously offered, any offer below or above NAV is made to all classes, and shares are not listed, offered, or traded on a secondary market (among others).
The proposal codifies many of the conditions of individual exemptive orders relied upon by multi-class closed-end funds and BDCs today. However, the SEC is not proposing to require compliance with FINRA compensation rules as a condition of relying on amended Rule 18f-3, which prior SEC exemptive orders had required multi-class privately offered BDCs to comply with, despite not being subject to such rules by their terms.
The proposal would require multi-class disclosure in fund prospectuses, largely mirroring the framework for open-end funds. Proposed changes include organization of registration statement items by class, per-class cover page descriptions and pricing tables, fee table instructions for multi-class funds (including a Rule 12b-1 fee caption), and per-class performance and advisory fee allocation disclosure.
Related Notices: Potential New Accredited Investor Designations
Alongside the fund proposals discussed above, the SEC issued five notices requesting comment on additional ways for individuals to qualify as accredited investors under Rule 501(a)(10) of Regulation D, which permits the SEC to designate professional certifications, designations or credentials for this purpose. The SEC used this authority in 2020 to designate holders in good standing of the Series 7, Series 65 and Series 82 licenses as qualifying as accredited investors. The five notices address:
- passage of an accredited investor exam to be developed by FINRA;
- a license as a U.S. certified public accountant in good standing;
- a Chartered Financial Analyst charter in good standing;
- a Certified Financial Planner certification in good standing; and
- the Investment Banking Representative license (Series 79) and the Research Analyst license (Series 86 and Series 87), each independently.
The public comment periods will remain open for 60 days after the date of publication of the five notices in the Federal Register.
Because the performance-based compensation proposal discussed above would incorporate the accredited investor definition into the qualified client definition, any credentials designated under these notices would also expand the pool of investors eligible to pay performance-based fees.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.
For further information, please contact:
Kevin T. Hardy, Partner, Skadden
