The SEC’s private-markets vote, read closely

Deep Dive: What the SEC’s Private-Markets Proposals Would Change

On September 30, the SEC’s three sitting commissioners voted unanimously to seek public comment on changes to retail access to private markets. Most coverage led with a possible FINRA exam that would let anyone 18 or older qualify as an accredited investor. The SEC is seeking feedback on that idea through a request for comment.

Two formal proposals could have more immediate consequences for how investors access private markets: one would change interval-fund repurchase and liquidity rules; the other would expand who can pay performance fees.

The packages were published in the Federal Register on October 5 and 6. Comments on the interval-fund proposal and accredited-investor notices are due December 4. Comments on the performance-fee proposal are due December 7.

Our analysis draws on law-firm summaries and press coverage. We have not reviewed the underlying SEC releases, which control, and we identify our inferences below.

Two proposals and five notices

The two formal proposals address interval funds and adviser performance fees. The five notices seek feedback on six possible routes to accredited-investor status.

One is the FINRA exam. The others involve professional credentials: a CPA license, the CFA charter, the CFP certification, and the Series 79, 86 and 87 licenses, according to King & Spalding. Holders of Series 7, 65 and 82 licenses have qualified as accredited investors since 2020.

The financial routes generally require net worth above $1 million, excluding a primary residence, or annual income of at least $300,000 for married couples, $200,000 for individuals for the past two years and a reasonable expectation of at least the same for the current year( The SEC estimated that 24.3 million U.S. households, or 18.5%, met the definition in 2022.

SEC Chair Paul Atkins said access to the accredited category “should not be limited solely to individuals satisfying financial thresholds,” according to Financial Planning. He has described the effort as “responsible retailization” of private markets.

Monthly repurchase offers could come with a higher minimum

An interval fund is a registered closed-end fund that offers to buy back a stated percentage of its shares at set intervals. Monthly offers currently require individual exemptive orders. The proposal would add a monthly option to the rule itself, according to Morrison Foerster and Dechert.

Both firms read the proposal as retaining a 5% minimum for each repurchase offer, including monthly offers, and rescinding orders that permit a 2% monthly minimum. Under the order Morrison Foerster describes, a fund can offer 2% a month if it offers at least 5% across each quarter. Under the proposal, as these law firms read it, a monthly fund would offer at least 5% every month. The SEC is also asking whether to lower the monthly floor to 2%.

These percentages describe how much a fund offers to repurchase. Actual repurchases depend on how many shares investors tender.

The proposal would also replace the requirement that a fund hold liquid assets equal to 100% of a repurchase offer. Funds would instead need to meet repurchases without selling investments at prices that deviate significantly from their value. Morrison Foerster says the release contemplates several sources of liquidity, including new subscriptions, loan repayments and credit facilities.

Other proposed changes include:

• Allowing a new interval fund to defer its first repurchase offer for up to two years.
• Allowing discretionary repurchases by closed-end funds and business development companies once a year, up from once every two years.
• Requiring funds that run monthly offers under exemptive orders to conform within a one-year compliance period, according to Morgan Lewis.

Our reading is that more frequent offers, potentially at larger minimum sizes, would put greater demands on fund liquidity. A less prescriptive liquidity rule would give funds more discretion over how to meet those demands. Whether that works well would depend on the policies funds adopt and boards approve.

Repurchase limits already matter

Private Equity Wire reported on June 4, citing Bloomberg, that Partners Group’s $8.6 billion Global Value evergreen fund capped withdrawals at 5% after a spike in requests.

A Delaware-domiciled private equity evergreen fund was expected to receive requests of about 6% of net asset value against a 5% quarterly limit. Three other mature funds, with $9.7 billion combined, were expected to receive requests of 3.5% to 5%. Partners Group said it was prepared to impose additional liquidity restrictions across its evergreen platform. The report said withdrawals were most pronounced among private wealth investors.

The comparison has limits. Those evergreen funds have their own terms, and the report does not identify them as interval funds covered by the proposal. They do illustrate what happens when withdrawal requests approach or exceed a fund’s repurchase limit.

The broader category is substantial. Morningstar and PitchBook counted $607 billion across 567 U.S. evergreen funds as of March 31. Evergreen funds that permit redemptions often set quarterly limits at 5%.

Reported private-company financials and secondary-market indications may be unaudited, incomplete, non-standard, or based on limited transaction activity. They should not be relied upon as fair value, executable pricing, or a basis for any investment decision.

Performance fees would reach more clients

Advisers generally may charge performance fees only to “qualified clients,” meaning clients with either $1.4 million under management with the adviser or a $2.7 million net worth. The proposal would extend qualified-client status to accredited investors and eliminate those two tests, according to Sullivan & Cromwell.

For registered funds and business development companies, performance compensation would be capped at 20% of net gains over a specified period. A majority of the board would need to be independent, and the board would have to make written findings. Performance fees could not differ by share class.

Several consequential questions remain open: whether fees could apply to unrealized appreciation, whether valuations should be independent, and whether fees should apply only to the private-market portion of a portfolio.

Those details would impact how a fund calculates its fee and when investors pay it.

The exam’s details remain open

Under the approach described by Sullivan & Cromwell, FINRA would write an exam open to anyone 18 or older, and passing would confer accredited status for ten years. Financial Planning reported that the exam would likely resemble FINRA’s Securities Industry Essentials exam.

The sources we reviewed do not establish its format, length, cost or passing score, or whether FINRA has finished developing it. The SEC’s proposal is not yet approved, and comments are due December 4.

Reactions in coverage have been mixed. Lance Dial of K&L Gates argued that wealth is an imperfect proxy for financial knowledge. Noah Damsky of Marina Wealth Advisors called the exam proposal “horrible” and questioned whether retail investors can follow complex private offerings. Financial Planning also reported that the SEC’s Investor Advisory Committee declined last year to endorse an exam route and recommended stronger reporting and protections for registered private funds.

Augment serves accredited investors, so changes to the definition bear on its business.

Our inference is that an exam route would matter most for direct private placements under Regulation D, including many special purpose vehicles and secondary transactions. Gunster advises companies raising capital under Regulation D to monitor these pathways. We have not confirmed exactly how the exam to confer accredited investor status would be considered under Regulation D or other exemptions.

That distinction matters for readers following the package: the exam concerns who could qualify to invest, while the fund proposals address repurchases, liquidity and fees.

Documents, terms and deadlines to watch

The next step is to read the primary documents. Willkie lists SEC file numbers S7-2026-28, S7-2026-34 and 4-931 through 4-935. We have not matched each number to its release.

For readers reviewing registered-fund documents, the proposals raise several practical questions:

• How often does the fund offer repurchases, and how large are those offers?
• How does it allocate repurchases when requests exceed the offer?
• How does the fund plan to meet repurchases, and who approves that policy?
• Can the fund defer its first repurchase offer?
• Would a performance fee apply to realized gains, unrealized gains or both?

Comments on the interval-fund proposal and accredited-investor notices are due December 4. Comments on the performance-fee proposal are due December 7.

Browse private-company pages on Augment for company information, recent coverage, and available market data.

Data Point of the Day

24.3 million

The number of U.S. households the SEC estimated met the accredited-investor definition in 2022, or 18.5% of all households, as cited by Financial Planning.

An exam, if adopted, would add a qualification route independent of income or net worth.

Manual

Interval Fund

An interval fund is a registered closed-end fund that, under SEC Rule 23c-3, offers to repurchase a stated percentage of its shares at set intervals. Investors cannot redeem at any time. Repurchase offers generally must cover between 5% and 25% of shares, and funds must hold liquid assets to cover the offer under current requirements. Monthly offers currently require exemptive relief.