Why the SEC’s ETF and mutual fund performance fee proposal may not expand retail access - Pensions & Investments

The U.S. Securities and Exchange Commission on Sept. 30 issued two proposals intended to give retail investors greater exposure to private markets through professionally managed funds. Pensions & Investments, in an analysis headlined "Why the SEC's ETF and mutual fund performance fee proposal may not expand retail access," examines whether the performance fee proposal will achieve that goal. The full article could not be retrieved, so this summary relies on its headline and on coverage from other outlets and the SEC.

The first proposal would allow investment advisers to registered funds, including mutual funds and ETFs, to receive performance fees calculated on net realized and net unrealized capital gains. Publisher coverage describes the change as a means of removing barriers to product innovation and enabling a broader set of managers to offer retail funds with private-market strategies. The second proposal would overhaul interval fund rules to increase operational flexibility, according to the SEC's own description of the package.

A statement issued alongside the proposals from an SEC commissioner supported the package as a way to address declining breadth in public markets. The statement noted that most retail investors do not meet the accredited investor definition under Regulation D and therefore cannot directly buy privately offered securities. It also noted that open-end funds generally cannot hold more than 15% of net assets in illiquid investments because of their daily redemption features, while closed-end funds and BDCs are better suited to such holdings. Under a long-standing informal staff position, closed-end funds and BDCs had either to limit investors to accredited investors with high minimums or cap private investments at 15% of assets. The SEC's change last year removed that constraint, which the commissioner said reflected that neither the Investment Company Act nor Commission rules required it. The Sept. 30 proposals build on that change.

Whether these measures will widen retail participation in practice remains an open question, and the publisher's headline signals skepticism on that point. Readers seeking the full analysis should consult the original Pensions & Investments article.