SEC Proposes Expanding Performance Fees for Registered Funds, BDCs
The SEC proposed expanding advisers' ability to charge performance fees to registered funds and business development companies. The Commission said the proposal would widen retail access to private market strategies while keeping investor protections.
The proposal would amend Rule 205-3. Advisers could share in fund gains if (i) the fee is capped at 20 percent of net gains over a specified period, including unrealized gains; (ii) the fund meets the board governance standards in Rule 0-1; and (iii) a majority-independent board finds the arrangement in the fund's best interest and makes written findings. The rule would cover open-end funds but not unit investment trusts. Only about 1 percent of funds use the existing fulcrum fee.
The proposal would also add accredited investors to the "qualified client" definition, dropping the separate net worth and assets-under-management tests. Certain registration and reporting forms would require disclosure of performance-based compensation.
Separately, the SEC issued five notices seeking comment on new routes to accredited investor status under Rule 501: passing a FINRA-developed exam; holding a CPA, CFA, or CFP credential; or holding a FINRA Series 79, 86, or 87 license.
Chair Paul Atkins called the proposal "responsible retailization." Commissioner Hester Peirce, whose resignation from the SEC is effective October 2, 2026, supported the proposal. In a separate statement, she questioned why FINRA should design the exam.
Comments are due 60 days after Federal Register publication.