SEC Proposes to Widen Who Can Pay Performance Fees: What Fund Managers Should Do

On 30 September 2026 the SEC proposed amendments to Rule 205-3 under the Investment Advisers Act, the rule that decides which clients an adviser may charge a performance-based fee, such as carried interest. The proposal, titled Investment Adviser Performance-Based Compensation Modernization, is file number S7-2026-28 (release numbers 33-11443, 34-106533, IA-7022 and IC-36350). It would change who counts as a qualified client, open performance fees to registered funds and business development companies on conditions, and require separate disclosure of those fees. Comments are due 60 days after the proposal is published in the Federal Register, and at the time of writing we could not confirm that publication date.

What the proposal would change

Today a qualified client is a person with at least $2.7 million in net worth or at least $1.4 million under management with the adviser, a qualified purchaser under the Investment Company Act, or certain knowledgeable employees of the adviser. Those dollar thresholds are adjusted for inflation every five years, and the most recent adjustment took effect on 29 June 2026. The proposal would add a new route: any investor who meets the Regulation D definition of an accredited investor would also be a qualified client. That definition includes individuals with net worth above $1 million excluding a primary residence, or income above $200,000 ($300,000 with a spouse), and certain entities with more than $5 million in assets.

The second change applies to registered funds and business development companies. They could pay an adviser performance-based compensation capped at 20% of net gains over a specified period, provided the fund meets board-governance conditions under Rule 0-1(a)(7) of the Investment Company Act, including a majority-independent board, and the board documents findings that the arrangement serves shareholders and has appropriate protections. Funds would also have to disclose performance-based compensation separately in their registration and reporting forms.

Why it matters to private fund managers

For funds that rely on section 3(c)(1), Rule 205-3(b) applies a look-through: each equity owner of the fund has to qualify as a qualified client for the adviser to charge carried interest. Lowering the net worth entry bar from $2.7 million to $1 million (excluding a primary residence) would make more individual investors eligible. Funds that limit themselves to qualified purchasers are generally outside that look-through, so the change matters most to managers raising from individuals and small family offices.

There is a competitive side too. If registered funds can charge up to 20% of net gains with board approval, private funds will find more regulated products marketed to the same investors. That is a long-run point and our reading of the proposal's logic, not something the SEC states, but it connects to the same trend we covered when the SEC proposed to widen retail access to private markets.

What GPs should do now

First, confirm which exemption each fund uses and how your documents define who may be charged carry. A fund that relies on section 3(c)(1) has the most to gain, and a fund that already limits itself to qualified purchasers has less. Second, review your investor base against the current thresholds, including the 29 June 2026 adjustment, and list the existing and prospective investors who fall between the accredited investor and qualified client standards. That list shows how much the proposal could change your investor pool if adopted. Third, do not amend subscription documents or marketing materials yet. This is a proposal, and the final text, any transition period and the effective date may differ. Fourth, decide whether to file a comment, because the window will close 60 days after Federal Register publication. Managers that raise from individuals have the strongest practical case to make.

Finally, keep an eye on how the SEC acts on proposals at all. The commission is operating with a reduced membership, which we explain in our piece on how the SEC fell to two commissioners and rewrote its quorum rule. Our guide to 506(b) versus 506(c) for fund managers is a useful companion if you are reviewing how you solicit investors.

How to take part in the comment process

Comments on file number S7-2026-28 can be submitted through the SEC's online comment form for that file. A useful comment names the specific provision, such as the new accredited investor route or the 20% of net gains cap, explains how it would affect a fund like yours using real figures, and proposes a concrete change. Trade groups often submit joint letters, so ask your counsel or industry association whether one is planned before you write your own. The comment record is public, and final rules often change in response to the specifics of the letters received.

What to watch next

Watch for the Federal Register publication date, which sets the comment deadline, and for any statements from commissioners about the final form. FundLinx members can see which LPs and family offices are active in your strategy.

This article is for information only and is not legal advice.

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