Proposed SEC Rule Would Expand Performance Fee Flexibility for Registered Funds

On September 30, 2026, the Securities and Exchange Commission (SEC) proposed to amend a rule under the Investment Advisers Act of 1940. The rule exempts registered investment advisers (RIAs) receiving compensation on the basis of realized and unrealized gains of an advisory client’s account. The proposal, Investment Adviser Performance-Based Compensation Modernization (Release No. 33-11443, File No. S7-2026-28), would increase performance fee flexibility for RIAs of registered funds.

This proposal would expand the RIAs’ ability to receive this form of compensation from registered management investment companies, specifically open-end funds, registered closed-end funds, and Business Development Companies (BDCs), subject to certain conditions.

Key Takeaways

• The Securities and Exchange Commission (SEC) proposed on September 30, 2026, to expand the performance fee flexibility for registered investment advisers (RIAs) of open-end funds, registered closed-end funds, and BDCs.
• A regulated fund could pay a performance fee without requiring shareholders to be qualified clients or accredited investors if it meets three conditions.
• The conditions are a 20% cap on net capital gains or net capital appreciation, compliance with Rule 0-1(a)(7) governance standards, and documented findings by the board.
• The proposal would also revise the qualified client definition to include accredited investors under Regulation D and remove the net worth and assets under management tests.
• Funds that adopt a performance fee would add a separate fee table line item, along with detailed disclosures regarding the performance fee and a graphical illustration of the fee across hypothetical performance outcomes to their disclosures.
• Comments on the proposal are due December 7, 2026.

How Would the Proposal Change the Qualified Client Definition?

The proposed rule amendments would also allow investment advisers to receive performance-based compensation from additional clients by revising the definition of “qualified client” to include investors who meet the definition of an “accredited investor” under Regulation D of the Securities Act of 1933. The proposal would remove the current net worth test and assets under management test associated with the qualified client definition. Since the above tests would be removed from the definition of qualified client, the existing inflation adjustment provision would become inapplicable.

By amending the existing definition of a qualified client, the proposed amendments would provide accredited investors with greater access to investment products that include performance fees.

Historically, performance-based compensation has been associated with private funds, such as hedge funds, private equity, and venture capital. Amending the rule to permit this form of compensation in regulated funds could facilitate broader access to such investment strategies.

What Conditions Would Regulated Funds Have to Meet?

The proposed amendments would expand the ability of RIAs of regulated funds to enter into investment advisory contracts with performance-based compensation arrangements, without requiring shareholders to be a qualified client or accredited investor, provided the fund meets the following conditions:

• The performance-based compensation does not exceed 20% of the regulated fund’s net capital gains or net capital appreciation over a specific period or as of definite dates.

• The regulated fund satisfies its governance standards under Rule 0-1(a)(7) of the Investment Company Act.

• As part of its annual review and approval of the advisory contract, the fund’s board, including a majority of independent directors, must determine that the performance-based compensation arrangement is in the best interest of the fund and its shareholders. The board must document specific findings on the arrangement’s appropriateness, structure, and investor-protection features.

What New Disclosures Would Funds Need to Provide?

• For regulated funds opting to adopt a performance fee, if the proposed amendments are finalized, they would be required to include in their registration, prospectuses, and other reporting forms the following new disclosures:

• The fee table would need to include a distinct line item for the performance fee, with a footnote describing its basis, cross-referencing other, more detailed disclosures on the performance fee, and explaining certain features of the performance fee. The expense example would also include the performance fee.
• The management discussion would include a detailed description of the performance fee arrangement, along with a graphical representation illustrating the performance fee across a range of hypothetical performance outcomes.

Considerations for Registered Funds and Advisers

Expanding RIAs’ ability to charge performance-based fees could incentivize RIAs currently operating in private markets to bring more diverse investment strategies to a wider group of investors and clients, including those in regulated funds.

Regulated closed-end funds, including interval funds, appear to be logical candidates to take advantage of the proposed amendments. It remains to be seen whether open-end funds, such as mutual funds and exchange-traded funds (ETFs), would seek to establish performance-based compensation given their structure.

The deadline to submit comments on this proposal is December 7, 2026. The above proposed amendments could be substantially modified before adoption. If your organization is considering a registered fund or evaluating performance fee arrangements, contact EisnerAmper’s Financial Services team to discuss how the proposal could affect your fund.