SEC proposes a 20% performance-fee route for regulated funds

The SEC is consulting on a broader route for registered investment advisers to charge performance fees to regulated funds and on an expansion of eligible private clients. Issued on 30 September 2026 and published in the Federal Register on 6 October, the proposal accepts comments until 7 December.[1]

The distribution question came into sharper focus in a 16 October speech by Investment Management Director Brian Daly. He argued that the cost of reaching retail investors, combined with low fees and margins, can discourage alternative managers from offering registered funds. Performance fees could alter that calculation. He presented this as a policy argument in a speech expressing his own views.[5]

The new fund route would carry its own conditions

The proposed definition excludes registered separate accounts offering variable annuities; unit investment trusts are outside the management-company category. The fee base could include unrealised appreciation.[3]

This matters commercially because a common percentage can describe very different contracts. A fee measured after each short gain, a fee that first recovers previous losses, and a fee paid only above a hurdle allocate returns differently. Comparing the headline percentage without the calculation terms would leave the central economic question unanswered.

Boards would review the arrangement annually. The proposal prescribes neither one minimum measurement period nor a universal high-water mark. Instead, boards must evaluate investor protections and explain their judgement, including where loss-protection features are absent.[3]

A recovery can produce a fee before an investor is whole

A hypothetical two-year example isolates the measurement issue. Start with US$100 million, assume no subscriptions or withdrawals, and exclude management fees, other expenses and taxes. Gross assets fall to US$80 million in year one, then recover to US$100 million before the second year’s performance fee.

The first arrangement pays the manager for the rebound even though the investor finishes below the starting capital. The second preserves the recovery for the investor. A purchaser therefore needs the loss-recovery terms alongside the advertised fee rate. For a distributor, that comparison belongs in product assessment before a fund is selected for a client portfolio.

Private-client eligibility would change through a separate route

The SEC also proposes adding accredited investors to the qualified-client definition and removing its separate assets-under-management and net-worth tests. The proposed 20% ceiling belongs to the new regulated-fund pathway; it is not a general limit on every adviser performance-fee contract.[2]

The current dollar tests took effect on 29 June 2026: at least US$1.4 million managed by the adviser, or net worth exceeding US$2.7 million, subject to the rule’s calculation and transition provisions. Those current thresholds should not be replaced in client eligibility systems merely because the SEC has proposed a different test.[4]

Qualified purchasers and certain knowledgeable employees would remain eligible through the qualified-client route. For section 3(c)(1) private funds, the proposal preserves the look-through to relevant equity owners. The fund’s own accredited status would not alone qualify its investors.[3]

Fund structure also affects the commercial opportunity. Commissioner Hester Peirce’s statement contrasts open-end funds’ liquidity constraints with the capacity of closed-end funds and BDCs to hold illiquid investments without meeting daily redemption demands. A more attractive fee model does not, by itself, resolve the liquidity design of a vehicle holding private assets.[6]

Disclosure would become part of the launch decision

Proposed disclosures include a separate performance-fee line, calculation details and an illustration. A proposed 12-month compliance period would generally apply to the form amendments if adopted, but a fund using the new route would need the relevant disclosures when it first relies on it.[3]

For an asset manager considering a new vehicle, the useful preparation is to model fees across rising, falling and recovering markets, then test whether distribution economics remain attractive under terms the board can support. The proposed permission creates an option; the contract design determines which party receives the upside and when.

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