The SEC has just announced a significant policy shift regarding registered closed-end funds offered to retail investors – they are no longer subject to the longstanding staff-imposed 15% cap on investments in private funds of the Investment Company Act. This policy change will provide greater access for non-accredited retail investors to invest in private equity and private credit markets. As discussed below, it also introduces heightened litigation and enforcement risk.
Since 2002, the SEC required closed-end funds investing more than 15% of their net assets in private funds to:
- Only sell shares to “Accredited Investors” (as defined by Regulation D, Rule 501(a)); and
- Impose a minimum initial investment of $25,000.
These requirements were not codified in law or formal SEC guidance, but through the Staff’s registration comment and review process.
Speaking at a conference on May 19-20, 2025, the SEC announced that it will no longer limit retail investor access to registered closed-end funds investing in private funds, In support of this significant rule change, SEC leadership cited the explosive growth of the private markets – tripling in assets over the past decade – and increased regulatory oversight as drivers for the change.
The policy shift will provide greater access to private equity and hedge fund strategies to retail investors, some of whom are not “Accredited” investors. This will, in turn, increase the risks faced by investment advisors and registered principals who recommend these types of investments to their clients.
- Increased Retail Investor Claims
- Retail investors, some of whom are not “Accredited,” may later allege unsophistication and inadequate disclosure of risks such as illiquidity, opaque valuations, and layered fees.
- Claims may arise from perceived conflicts of interest or insufficient explanation of private fund risks in offering documents.
- Claims may arise from illiquidity constraints. Closed-end funds, unlike open-ended mutual funds, do not have to meet daily redemption requests, so they can hold more illiquid investments without the same risk of forced asset sales.
- SEC Enforcement Focus
- The SEC has signaled continued scrutiny of disclosures, particularly on liquidity management, fee transparency, and valuation practices.
- SEC investigations or deficiency notices often precede private lawsuits, compounding exposure.
- Compliance Gaps and Transition Risks
- The rapid policy change may result in inconsistent practices or legacy restrictions persisting in operations, increasing regulatory risk.
- Staff may inadvertently miscommunicate new fund strategies, heightening reputational and legal exposure.
Risk Mitigation Recommendations
- Enhance Disclosures: Ensure all offering materials clearly articulate private fund risks, conflicts and fee structures.
- Document Due Diligence: Maintain robust records of fund selection, liquidity assessments, and conflict reviews.
- Review Insurance Coverage: Confirm D&O/E&O policies address new exposures related to private fund investments.
- Prepare for SEC Exams: Be ready to demonstrate compliance with disclosure and risk management expectations in the new environment.
Bottom Line:
The SEC’s removal of the 15% cap marks a new era for retail closed-end funds, but it also brings substantial litigation and regulatory risk. Investment Advisors should anticipate a potential uptick in claims tied to misrepresentation, omission or breach of fiduciary duty. Proactive compliance and disclosure enhancements are essential to mitigate potential exposure. WSS will be monitoring the impact of this SEC policy change and advising its clients as to how regulators and market participants respond going forward.
If you have any questions or wish to discuss this development further, please contact Michael Schwartzberg or another member of WSS’s Securities Litigation and Regulatory Practice Group
