The part of the SEC package that fund managers should read first

Most coverage of the SEC's Sept. 30 "responsible retailization" package has focused on the idea of an exam that would let ordinary people qualify as accredited investors. That is a real change for issuers raising money under Regulation D, and we covered it last week. But a second proposal in the same package may matter more day to day for anyone running a fund: it links the definition of "accredited investor" to the rules on who can be charged performance fees.

The proposal is titled "Investment Adviser Performance-Based Compensation Modernization." The SEC lists it as File No. S7-2026-28, Release No. 33-11443, issued Sept. 30, 2026. It is a proposal only. Nothing changes until the SEC adopts a final rule.

What the rule would change

Today, an SEC-registered adviser generally can charge performance-based compensation, such as carried interest, only to "qualified clients." Under the current thresholds, as Dechert describes them, that means a $2.7 million net worth test or a $1.4 million assets-under-management test.

The proposal would add accredited investor status under Regulation D as a way to qualify, and remove those two standalone tests. Gibson Dunn's summary says any investor the adviser reasonably believes is an accredited investor when the contract is signed would qualify.

Accredited status under Rule 501 is a lower bar than the qualified client tests in one respect. As Morrison Foerster notes, an individual can qualify with net worth over $1 million excluding a primary residence, or income over $200,000 ($300,000 jointly) in each of the last two years. That is well below the $2.7 million net worth figure used for performance fees today.

Why this simplifies fundraising

The practical benefit is paperwork. Dechert notes that funds relying on the Section 3(c)(1) exclusion that already limit investors to accredited investors under Regulation D would no longer need a separate qualified-client screen. Kirkland makes the same point for separately managed accounts of accredited investors, and says status would be tested when the contract is entered into or when a fund investor joins.

For a first-time manager, that means one investor question in the subscription documents instead of two. Advisers could still set minimum investments and other investor restrictions, according to Dechert, so a fund that wants a higher bar can keep one.

Caveats that cut the other way

The proposal is not a blanket loosening.

  • Prospective only. Kirkland says the changes would apply going forward, so existing arrangements generally would not be affected.
  • Funds of funds need a look-through. Under Kirkland's reading, a private investment company would not qualify merely because it is itself an accredited investor. It would qualify only if its equity owners separately qualify.
  • Entities can face a higher test. Gibson Dunn reports that an entity qualifying on assets alone would need $5 million in assets, which is higher than the current $2.7 million net worth test.

The accredited investor definition also remains in play. The same package includes five notices seeking comment on whether credentials such as the CPA license, CFA charter, CFP certification, FINRA Series 79 and Series 86/87 should qualify an individual, plus the proposed FINRA-administered exam, which anyone 18 or older could take and which would confer status for 10 years, according to Gibson Dunn. Those are requests for comment, not rule text. But because the performance fee proposal borrows the Reg D definition, any widening of that definition would flow straight into who can be charged performance fees. Kirkland lists the credentials and the exam alongside the qualified client change in its coverage of the package.

Beyond private funds

The proposal also reaches registered vehicles. Per the SEC's page, it would expand advisers' ability to receive performance-based compensation from registered management investment companies and business development companies, subject to conditions, and would require separate disclosure of those fees in registration and reporting forms.

Dechert adds detail: a regulated fund would qualify if each equity owner is a qualified client, or if three conditions are met, namely a 20% cap on performance fees, the fund governance standards in Rule 0-1(a)(7), and a board best-interest finding under Section 15(c). Fees could be based on both realized and unrealized gains, unlike the current exception that Dechert says is limited to BDCs. Funds adopting such fees would need a fee table line item, expense examples reflecting the fee and a graphical illustration of how the fee is calculated.

For issuers and sponsors, the point is competitive. If registered and listed-style vehicles can charge performance fees, they become a more direct alternative to private funds for some investors. That affects where capital goes, and it is worth watching how managers of private credit and private equity funds respond.

What to watch

Comment deadline. Comments are due 60 days after Federal Register publication. None of the sources we reviewed gave a calendar date, so check the Federal Register notice before planning a comment letter.

Who will vote. Gibson Dunn reports that Commissioner Hester Peirce's resignation took effect Oct. 2, leaving Chairman Paul Atkins and Commissioner Mark Uyeda, and that no nominee has been announced. Under the quorum rule, it says, the two remaining commissioners could adopt final rules once comment periods close. The proposals had unanimous support at the Sept. 30 meeting.

Which pieces survive. Treat this as a menu rather than a package deal. The accredited-investor credential notices are being considered independently, per Morrison Foerster, so the SEC could act on some and not others.

What to do now. Fund managers who are drafting subscription documents or planning a launch should ask counsel whether to build in flexibility for the proposed standard, and entity-heavy investor bases should model the $5 million asset test. Nothing here is final, and this is general information, not legal or investment advice.

Sources