SEC proposes letting advisers charge up to 20% performance fees on private funds

The Securities and Exchange Commission approved a proposal Wednesday that would let registered investment advisers charge a fee of up to 20% based on a fund's performance, a structure the agency said would bring adviser fees more in line with the traditional arrangement used by some hedge funds, while two companion measures would widen the accredited-investor definition and give interval funds more flexibility around redemptions. Bloomberg's account, published by WealthManagement.com, places all three inside the administration's broader effort to put private equity, private credit and early-stage startups within reach of individual investors.

The fee's stated purpose is to bring the structure closer to the hedge-fund arrangement and help incentivize managers who would not normally work with retail investors, the agency said, an argument about recruiting supply. The account paying it, in the ordinary case, would be a retail investor's, and that same account already pays for advice.

Chairman Paul Atkins said during the meeting: "One of my priorities for the commission is to explore ways to facilitate the ability of individual investors to participate in private markets while at the same time protecting those investors from bad actors and fraud." Access and protection share the sentence; the three proposals are weighted toward the first.

The fee would be charged by the adviser, who is also the party selecting which fund sits in the account, and that combination is where the argument belongs: a performance-based payment to the person choosing the product aligns client and adviser while the fund works and gives the adviser a reason to prefer whichever fund shows the strongest number going in. This publication has reported that Merrill's updated Form ADV discloses shelf fees as high as $1.4 million and an incentive to recommend products from firms that pay for data analytics, which is a public filing showing recommendation economics already being priced.

The commission will take public comment on each proposal for 60 days, a window that decides whether the 20% arrives with the guardrails that give a performance-based fee its meaning. The reporting does not say whether the fee is measured against a hurdle, whether a high-water mark applies, or whether it is calculated before or after the fund's other costs; those three terms separate payment for performance from payment for participation.

The third proposal has the most direct effect on what a client statement can show: interval funds let investors redeem at set periods and are less liquid than open-end mutual funds, and the SEC wants to give them more flexibility around redemptions. Brian Daly, who directs the agency's Division of Investment Management, told the meeting the funds have "tremendous utility" but that the prescriptiveness of their existing structure is restricting their use.

More flexibility for the fund is not the same as more liquidity for the person holding it, and the reporting does not spell out how the relief is expected to reach the shareholder. We have argued in these pages that private credit's liquidity gate is its real term sheet, and that interval funds and steady inflows push the first clearing prices further out instead of removing them; the SEC spent this week reminding private-asset managers to sharpen valuations, and the paper trail allocators lean on is still getting longer.

The semi-liquid end of the market has already run the experiment: our reporting on KKR's European evergreen business found the ranking flipped on withdrawals at Partners Group as much as on fundraising at KKR. Whatever the redemption calendar says, the assets inside an interval fund are still private credit and private equity, and their price is being set somewhere else.

The accredited-investor proposal changes a different population, adding professional licenses to the ways a person can qualify for the label that gates purchases of riskier assets, including those held by certified public accountants and chartered financial analysts. The general test stays put: more than $1 million in net worth excluding a primary residence, or income over $200,000 for an individual or $300,000 for partners. The report notes this is the second time under President Donald Trump that the SEC has moved to expand the definition, after easing some restrictions in his first term.

Credentials are a proxy for sophistication, balance sheets a proxy for the capacity to absorb a loss; accepting the first where the agency already accepted the second widens the roster of people a wholesaler can call without settling whether the products suit them, and the 60-day comment file is where that question gets argued.

Officials have already taken steps in this direction this year, including a proposal that could make it easier for retirement savings plans to include private credit and private equity, according to the report; put that alongside Wednesday's three and the commission has touched, within a year, who may buy private assets, what may be charged for them, and how fast a holder can get out.

The rulebook is changing faster than the allocations that would justify it. RIA allocations to alternatives have held near 3% even as the infrastructure built to sell them draws billion-dollar bids, and comment closes in 60 days on all three.