Proposed SEC Amendments Aim to Expand Retail, Individual Investor Access to Private Markets

Consistent with the U.S. Securities and Exchange Commission's (SEC) push to expand retail investor access to private markets, its commissioners on September 30, 2026, voted 3-0 to propose amendments to Rule 205-3 under the Investment Advisers Act of 1940 (Advisers Act) and to Rules 23c-3, 18f-3 and 17d-3 under the Investment Company Act of 1940 (Company Act) to expand investment advisers' ability to charge performance-based compensation and promote innovation in certain regulated fund structures (collectively, the Proposals).¹ As described in more detail below, the Proposals would:

• amend Rule 205-3 under the Advisers Act to permit investment advisers to charge performance-based compensation to funds registered as investment companies under the Company Act and business development companies (BDCs) (on net realized and net unrealized capital appreciation), in each case subject to a 20 percent cap, fund governance conditions and annual board best-interest findings; the proposal would also expand the "qualified client" definition to include "accredited investors" and eliminate the current net worth and assets-under-management tests
• amend Rule 23c-3 to modernize the interval fund repurchase and liquidity framework and amend Rules 18f-3 and 17d-3 to permit closed-end funds and BDCs to issue multiple share classes without individual exemptive relief

In addition, the SEC published five separate notices requesting public comment on whether to designate additional credentials – a new Financial Industry Regulatory Authority (FINRA)-accredited investor exam and the Certified Public Accountant (CPA), Chartered Financial Analyst (CFA), Certified Financial Planner (CFP) and FINRA Series 79/86/87 licenses – as qualifying individuals for accredited investor status under Rule 501(a)(10).

Taken together, if adopted, these changes would significantly expand registered investment advisers' (RIAs) ability to charge performance fees to separately managed account clients and certain regulated funds while also expanding access to private securities offerings for a broader range of individual investors.

Investment Adviser Performance-Based Compensation Modernization

Section 205(a)(1) of the Advisers Act generally prohibits RIAs² from charging performance fees unless the client is a "qualified client" as defined in Rule 205-3. A client currently qualifies by having at least $1.4 million in assets under management (AUM) with the RIA or a net worth of at least $2.7 million.³ Qualified purchasers and certain "knowledgeable employees" of an RIA are also deemed qualified clients regardless of these dollar amounts.⁴ Although a private fund managed by an RIA is considered the "client" for purposes of the Advisers Act (not the fund's investors), Rule 205-3 looks through certain vehicles – including private funds that rely on Section 3(c)(1) of the Company Act, registered investment companies and BDCs – and applies the qualified client requirement to their investors.⁵ Currently, a narrow statutory exception permits investment advisers to BDCs to include performance fee arrangements in their advisory contracts, provided that the fee does not exceed 20 percent of the BDC's net realized capital gains over a defined period and the BDC does not have other incentive compensation structures in place.⁶

The Proposals would substantially expand the performance-fee framework in two ways. First, advisers to registered investment companies and BDCs could charge performance fees on both realized and unrealized capital gains or appreciation, without regard to individual shareholders' qualified client status, provided that 1) the fee does not exceed 20 percent of the fund's net capital gains over a specified period, 2) the fund's board satisfies the "fund governance standards" of Rule 0-1(a)(7) under the Company Act and 3) the board, as part of its annual review under Section 15(c) of the Company Act, makes specific written findings that the arrangement is in the fund's and shareholders' best interests, addressing the fee's appropriateness given the fund's strategy and valuation practices, its basis (realized versus unrealized, measurement period) and the adequacy of investor protections, such as hurdle rates or high-water marks. The Proposals would also amend Forms N-1A, N-2 and N-CSR to require that regulated funds add a separate "Performance Fees" line item to the prospectus fee table, disclose the fee's basis (realized/unrealized gains, measurement period, protective features) in the prospectus with a graphical illustration of hypothetical scenarios and, for certain registered funds, include particularized Form N-CSR disclosure regarding the board's findings related to the approval of performance fees.

Second, the "qualified client" definition would be amended to include any person or entity the investment adviser reasonably believes is an "accredited investor" under Regulation D while eliminating the existing $2.7 million net worth and $1.4 million AUM tests entirely. This would allow advisers to charge performance fees to accredited investors directly through funds relying on Section 3(c)(1) whose investors are accredited or through separately managed accounts, without the higher thresholds that currently apply.⁷ This amendment would also have other important implications beyond performance fees given that the "qualified client" definition is cross-referenced elsewhere in the Advisers Act rules. Rule 203A-3 under the Advisers Act exempts a supervised person from "investment adviser representative" (IAR) status – and, therefore, from state licensing, examination and oversight requirements – if the person has five or fewer individual clients (or 10 percent or less of their clients are individuals) who are not "excepted persons," a term currently tied to qualified client status. By including accredited investors into that definition, the pool of "excepted persons" would expand significantly, potentially allowing some state-licensed IARs to avoid that status and the associated requirements.

Taken together, these changes may draw significant attention from state securities regulators. If adopted, the Proposals would 1) potentially increase the compensation advisers may earn by expanding the circumstances in which performance fees may be charged, 2) potentially increase the number of clients eligible for performance-fee arrangements and related investments by extending "qualified client" status to accredited investors and 3) potentially eliminate direct state oversight of certain individual IARs by expanding the pool of "excepted persons" under Rule 203A-3. Each of these changes may affect areas that state regulators have traditionally viewed as central to their investor protection mandate. Although it is not yet clear what action, if any, the states may take, including whether individual states may amend their laws or regulations to retain the current "qualified client" standard or otherwise seek to impose limitations framed around investor protection, anticipate that state regulators and their representative organizations may submit significant comments on the Proposals.

Interval Fund Modernization

The SEC established the interval fund framework through the adoption of Rule 23c-3 under the Company Act in 1993, and that framework has remained largely unchanged since it was first adopted. The Proposals would amend Rule 23c-3 to give interval funds significantly more flexibility: 1) funds could defer their first repurchase offer for up to two years after registration (versus the current two-periodic-interval limit, e.g., six months for a quarterly fund), 2) funds could adopt monthly repurchase intervals (in addition to the current three-, six- and 12-month options), with corresponding adjustments to shareholder notification timing, 3) discretionary repurchases (outside the fund's fundamental policy) could be made annually rather than once every two years, 4) interval funds could deduct deferred sales loads from repurchase proceeds, subject to conditions mirroring those applicable to open-end funds, and 5) the current requirement that a fund hold 100 percent of the repurchase offer amount in liquid assets throughout the repurchase window would be replaced with a more principles-based liquidity standard.

As investors increasingly seek access to private markets, interval funds can offer a way to deliver that exposure while maintaining a level of investor liquidity. The structure allows asset managers to invest in less-liquid holdings while still offering investors predictable, rules-based liquidity at set intervals. The current requirement that a fund hold 100 percent of the repurchase offer amount in liquid assets throughout the repurchase window, however, has been cited by industry participants as a significant factor limiting broader adoption of the interval fund structure because it can create "cash drag" that reduces portfolio yield and, in some cases, has made the structure impractical for strategies focused on less-liquid assets. By replacing that requirement with a more principles-based liquidity standard, the proposed amendments are intended to give fund managers more flexibility to match portfolio liquidity to their investment strategy, which the SEC anticipates could encourage broader adoption of the interval fund structure by managers seeking to offer retail investors registered, liquidity-managed access to private markets.

Expansion of Multiple Share Class to Registered Closed-End Management Investment Companies and BDCs

Multiple share class structures have long been available to open-end funds under Rule 18f-3 and, since 2025, the SEC has granted exemptive relief permitting existing mutual funds to add ETF share classes within the same portfolio. Rule 18f-3 is not currently available to closed-end funds and BDCs, however, and they have had to rely on individual exemptive orders to offer multiple share classes.

Under the Proposals, Rule 18f-3 would be extended to closed-end funds (including BDCs), allowing them to offer multiple share classes without an individual exemptive order. To rely on the amended rule, a closed-end fund must offer its shares on a continuous basis, treat all classes equally in any below-net asset value (NAV) offering or repurchase offer, and comply with Rule 12b-1 (as if the fund were open-end) for any asset-based distribution fee. A parallel amendment to Rule 17d-3 would permit affiliated distribution arrangements for these funds. The Proposals would also amend Form N-2 and Form N-CEN to require enhanced disclosure and reporting regarding multiple share class and master-feeder fund structures, consistent with existing requirements for open-end funds.

Multiple share class structures allow a single fund to offer shares through different fee and distribution arrangements, giving investors the flexibility to select the purchasing method best suited to their individual circumstances while allowing fund sponsors to reach a broader range of distribution channels without the cost of organizing separate funds for each investor segment. Because fixed costs are spread across a larger asset base, funds that offer multiple share classes can also achieve economies of scale that benefit investors through lower fees. Closed-end funds seeking this flexibility, however, have had to bear the cost and delay of applying for individual exemptive relief, a time-consuming and expensive process. By proposing to codify this relief into Rule 18f-3, the proposed amendments are intended to make multiclass structures more readily available to closed-end funds, which the SEC anticipates could expand the range of distribution channels through which retail investors can access these funds and reduce the costs associated with doing so.

Potential New Accredited Investor Designations

The SEC issued five notices requesting comment on whether to designate the following credentials as "qualifying natural persons" for accredited investor status under Rule 501(a)(10) of Regulation D:

• a new FINRA-administered accredited investor exam – FINRA would develop and administer a roughly 75-question, two-hour exam (modeled on FINRA's existing Securities Industry Essentials exam) covering securities structures, investment risk, disclosure requirements, financial statements, conflicts of interest and corporate governance; the exam would be open to any person 18 or older (no industry affiliation required), cost approximately $100 and remain valid for 10 years before requiring retesting
• U.S. CPA license, held in good standing
• CFA charter, held in good standing
• U.S. CFP certification, held in good standing
• FINRA Series 79 (Investment Banking Representative) and Series 86/87 (Research Analyst) licenses, each independently

These are proposals, not final rules, so no compliance action is required now. The comment periods run 60 days from Federal Register publication. Firms should consider commenting on the open questions raised throughout this alert.

Holland & Knight will continue to monitor these proposals as they progress through the notice-and-comment period. For questions or assistance, please contact your Holland & Knight relationship attorney or the authors.

Notes

¹ See Investment Adviser Performance-Based Compensation Modernization, SEC Release Nos. 33-11443; 34-106533; IA-7022; IC-36350 (Sept. 30, 2026); Interval Fund Modernization; Expansion of Multiple Share Class to Registered Closed-End Management Investment Companies and Business Development Companies, SEC Release Nos. 33-11444; 34-106534; IC-36351 (Sept. 30, 2026); Potential Designation of Passage of an Accredited Investor Exam to Be Developed by FINRA as Qualifying Natural Persons for Accredited Investor Status, SEC Release No. 33-11445 (Sept. 30, 2026); Potential Designation of U.S. Certified Public Accountant License as Qualifying Natural Persons for Accredited Investor Status, SEC Release No. 33-11446 (Sept. 30, 2026); Potential Designation of Chartered Financial Analyst Designation as Qualifying Natural Persons for Accredited Investor Status, SEC Release No. 33-11447 (Sept. 30, 2026); Potential Designation of Certified Financial Planner Certification as Qualifying Natural Persons for Accredited Investor Status, SEC Release No. 33-11448 (Sept. 30, 2026); Potential Designations of the Investment Banking Representative License (Series 79) and the Research Analyst License (Series 86 and Series 87) as Qualifying Natural Persons for Accredited Investor Status, SEC Release No. 33-11449 (Sept. 30, 2026).

² Though Section 205(a)(1) and Rule 205-3 apply only to investment advisers registered with the SEC, the laws of many states incorporate by reference the "qualified client" standard under Rule 205-3 in applying certain state-level investment adviser registration exemptions and other requirements. It is not yet clear how the various states will react – e.g., whether they will change their laws or regulations to retain the current "qualified client" standard.

³ AUM is calculated as the total of uncalled capital commitments plus the gross asset value or fair value of existing investments managed by the adviser.

⁴ See Rule 205-3(d)(1)(ii)(A) under the Advisers Act.

⁵ See Section 205(b)(5) of the Advisers Act; Rule 205-3(d)(1)(ii)(B) and (iii) under the Advisers Act.

⁶ See Section 205(b)(3) of the Advisers Act.

⁷ An individual generally is an "accredited investor" if the individual has a net worth exceeding $1 million (excluding the value of the individual's primary residence and any indebtedness secured by such residence up to the estimated value of the residence), either alone or together with a spouse or spousal equivalent, or had income exceeding $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the two most recent years, with a reasonable expectation of reaching the same income level in the current year. See Rule 501(a) under the Securities Act.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.