Investment Management & Funds Regulatory Update – October 2026

Rules and regulations

SEC proposes to (i) expand performance-based compensation for advisers to regulated funds and (ii) revise the “qualified client” definition to include accredited investors, regardless of net worth and assets under management

On September 30, 2026, the SEC proposed amendments to Rule 205-3 under the Investment Advisers Act, which exempts registered investment advisers from the Advisers Act’s general prohibition on receiving compensation based on a share of capital gains or capital appreciation of a client’s account (Release No. IA-7022).[1] Even if not all investors are qualified clients, the proposal would expand the ability of advisers to receive performance-based compensation from registered management investment companies and business development companies (together, “regulated funds”), subject to certain conditions, while requiring regulated funds to separately disclose performance-based compensation paid to the adviser in their registration and reporting forms.

According to the SEC, performance-based compensation has long been a defining characteristic of private fund strategies such as hedge fund, private equity and venture capital strategies, and the limitation of such arrangements to a narrow group of eligible investors has, as a practical matter, restricted retail access to those strategies. The SEC stated that permitting similar incentives for advisers to regulated funds, regardless of the presence of investors who are not qualified clients, may make those advisers more likely to launch and allocate private market strategies to regulated funds. Under the proposal, an adviser to a regulated fund could receive performance-based compensation only if:

• the performance-based compensation does not exceed 20% of the regulated fund’s net capital gains or net capital appreciation over a specified period;
• the regulated fund satisfies the fund governance standards set forth in Rule 0-1(a)(7) under the Investment Company Act; and
• the regulated fund’s board, including a majority of independent directors, determines that the arrangement is in the best interest of the fund and its shareholders, and makes specific findings regarding the arrangement’s appropriateness, structure and investor protection features.

Notably, the proposed exemption would be available to all regulated funds, including mutual funds and ETFs, and would permit performance fees on net unrealized, as well as realized, capital appreciation. By contrast, the existing statutory exception in Section 205(b)(3) of the Advisers Act permits BDC advisers to receive capital gains compensation only on realized gains; BDCs could elect to rely on either the statute or the amended rule. The proposal generally would apply prospectively, and an existing fund that adopts a performance fee under the amended rule generally would need shareholder approval of the amended advisory contract under Section 15 of the Investment Company Act.

The proposal would also revise the “qualified client” definition in Rule 205-3 to include investors that meet the “accredited investor” definition in Regulation D under the Securities Act, and would remove the separate net worth and assets under management tests from the qualified client definition.[2] Chairman Atkins stated that the Commission’s efforts to facilitate individual investor participation in private markets complement efforts undertaken pursuant to the President’s Executive Order on Democratizing Access to Alternative Assets for 401(k) Investors.

If adopted, the revised qualified client definition would broaden the pool of separately managed account clients and Section 3(c)(1) fund investors from whom advisers may charge performance fees, and would close the existing gap under which an accredited investor may invest in a Section 3(c)(1) fund but cannot be charged a performance fee. Advisers would need to reasonably believe that a client is an accredited investor at the time the contract is entered into, and a Section 3(c)(1) fund could not qualify on the basis of its own accredited investor status. The change would not expand eligibility in every case: entity investors that currently rely on the $2.7 million net worth or $1.4 million assets under management tests would instead be subject to the accredited investor definition’s $5 million tests. Existing contracts generally would be grandfathered, but new investors joining an existing fund would be tested under the rule in effect at that time. The proposing release was published in the Federal Register on October 6, 2026, and comments are due on or before December 7, 2026.

SEC proposes interval fund modernization and multiple share classes for closed-end funds

Also on September 30, 2026, the SEC proposed amendments to Rule 23c-3 under the Investment Company Act, which governs interval funds—registered closed-end funds and business development companies that make periodic repurchase offers to shareholders pursuant to a fundamental policy (Release No. IC-36351).[3] The proposal is intended to increase flexibility in the repurchase offer process and allow interval funds to better match repurchases to the liquidity profile of their portfolios. Among other things, the proposed amendments would:

• permit extended deferral of an interval fund’s first repurchase offer;
• permit more frequent discretionary repurchases and monthly periodic repurchase intervals;
• permit the deduction of deferred sales loads from repurchase proceeds, subject to certain conditions;
• simplify and clarify the process for determining the repurchase pricing date and the treatment of oversubscribed repurchase offers; and
• replace the rule’s requirement that an interval fund hold assets equal to 100% of the repurchase offer amount in liquid assets during the offer period with a principles-based liquidity approach.

The proposal would also amend certain rules under the Investment Company Act to permit regulated closed-end funds to issue multiple share classes, generally consistent with the existing exemptive framework for registered open-end funds, and to allow such funds and their affiliates to enter into arrangements for the payment of asset-based distribution and service fees. Related amendments would update prospectus disclosure requirements to account for multiple share class and master-feeder structures, enhance multiple share class reporting by certain regulated closed-end funds and require enhanced expense disclosures for all regulated closed-end funds. As a result of the proposed amendments, the SEC proposed to rescind certain existing exemptive orders relating to interval funds and multiple share class arrangements for regulated closed-end funds.

Fund sponsors that currently rely on multi-class exemptive orders should monitor the proposal closely, as the proposed rescission of those orders would require a transition to the new rules-based framework if the proposal is adopted. The proposing release was published in the Federal Register on October 5, 2026, and comments are due on or before December 4, 2026.

SEC proposes custody framework for crypto assets held by advisers and regulated funds

On October 1, 2026, the SEC proposed new rules and amendments under the Advisers Act and the Investment Company Act to provide a tailored framework for the custody of crypto assets by registered investment advisers and regulated funds (Release No. IA-7023).[4] According to the SEC, the proposal is designed to remove regulatory barriers that inhibit advisers’ ability to provide crypto-related investment advice and to allow regulated funds to offer access to a wider range of crypto asset-related investment strategies. Chairman Atkins stated that the proposal would give investment advisers and funds “a compliant pathway where none existed before.”

Among other things, the proposal would permit crypto assets to be held in self-custody under certain circumstances and would allow the use of state trust companies as custodians for client and regulated fund crypto assets. Self-custody would be available only where the adviser determines, before taking custody and quarterly thereafter, that a permitted custodian is not available, and would be subject to conditions including safeguarding systems addressing private key management and joint authorization of transactions by at least two people, segregation of each client’s crypto assets at separate addresses, and annual internal control reports from an independent public accountant. The proposal would also modernize the existing custody rules more broadly, including by redesignating the Advisers Act custody rule, eliminating the PCAOB registration and inspection requirement for accountants engaged under the rule, adding exceptions for discretionary trading authority, standing letters of authorization and inadvertent custody, and amending Form ADV and Form N-CEN.[5]

The proposal follows the SEC’s August 2026 proposal of Regulation Crypto Assets and its June 2026 request for comment on novel ETFs (the latter of which we discussed in our September 2026 update), and reflects the Commission’s continued focus on establishing a regulatory framework for crypto asset activities. The proposing release was published in the Federal Register on October 6, 2026, and comments are due on or before December 7, 2026.

Industry update

SEC requests comment on additional ways to qualify as an accredited investor

In connection with its September 30, 2026 proposals, the SEC issued a series of notices requesting public comment on potential additional methods for individuals to qualify as accredited investors under Regulation D under the Securities Act.[6] The SEC is seeking comment on the potential designation of passage of an accredited investor exam to be developed by FINRA, which the SEC described as a pathway, other than those dependent upon income or net assets, for investors to demonstrate sophistication in securities, investing, and financial and business matters. The SEC is also considering the designation of holding, in good standing, the following licenses, certifications or credentials:

•  a license as a U.S. certified public accountant (CPA);
• a Chartered Financial Analyst (CFA) charter;
• a Certified Financial Planner (CFP) certification in the United States; and
• the FINRA Investment Banking Representative license (Series 79) and Research Analyst licenses (Series 86 and Series 87).   

The notices were issued under Rule 501(a)(10), under which the SEC designated the Series 7, 65 and 82 licenses in 2020, and the new designations would be the first expansion of that credential-based pathway. According to the notice for a potential accredited investor exam administered by FINRA, the exam would be open to anyone age 18 or older, would be modeled largely on the Securities Industry Essentials exam, and would confer accredited investor status for 10 years. Credential holders would qualify only for their own accounts, and the designations would not become effective until the SEC issues a subsequent order following the comment period. Because the proposed amendments to Rule 205-3 would cross-reference the accredited investor definition, any expansion of the accredited investor definition would, if both initiatives are adopted, also expand the population of qualified clients. Private fund sponsors should monitor these developments in connection with investor eligibility criteria and offering procedures. The notices were published in the Federal Register on October 5, 2026, and comments are due on or before December 4, 2026.

SEC Division of Examinations publishes new Exam Handbook

On October 1, 2026, the SEC’s Division of Examinations published “The SEC Exam Handbook: A Practical Guide on Process and Engagement,” which replaces and expands upon the Division’s previous examination brochure.[7] The handbook covers each stage of an examination, from the risk assessment process through the disposition letter, and identifies avenues for registrants to provide feedback or ask questions. It also provides practical tips and resources to help registrants prepare for examinations and stay current on compliance obligations.

Division Director Keith Cassidy stated that the handbook responds to “the call from registrants to provide more clarity to the exam process” and aims to make the process “more consistent and predictable for everyone involved.” Registered investment advisers, registered funds and broker-dealers should review the handbook and consider whether their examination readiness procedures, document production protocols and internal escalation processes are aligned with the process it describes.

Litigation

SEC settles charges against adviser referral platform for failure to disclose conflicts of interest

On September 28, 2026, the SEC settled charges against Zoe Financial Inc., a New York-based registered investment adviser, for failing to fully and fairly disclose material facts concerning conflicts of interest to its clients and prospective clients.[8] According to the SEC’s order, Zoe Financial operated a referral service that used an algorithm to match individuals seeking an investment adviser with third-party advisers in its network. Salespeople often followed up with individuals who had not scheduled meetings with an algorithm-generated match and, in many instances, recommended additional advisers beyond those generated by the algorithm.

In January 2023, Zoe Financial launched Zoe Wealth, through which it offered sub-advisory services, account onboarding assistance and other back-office support to its network advisers. The SEC found that Zoe Financial had a financial incentive for network advisers to use Zoe Wealth and encouraged them to do so, and that, while the algorithm did not consider whether an adviser used Zoe Wealth, salespeople on many occasions suggested advisers that had not initially been recommended by the algorithm. The SEC found that Zoe Financial did not adequately disclose the resulting conflict in its Form ADV brochure until December 2024, and that, although it disclosed that certain advisory firms held indirect minority interests in Zoe Financial, it did not accurately describe how it mitigated that conflict.

The SEC found that Zoe Financial willfully violated Section 206(2) of the Advisers Act. Without admitting the findings, Zoe Financial agreed to a cease-and-desist order, a censure and a $450,000 civil penalty. The order acknowledged remedial measures including compliance manual revisions and the hiring of an in-house chief compliance officer. The action is a reminder that advisers must ensure their conflicts disclosure keeps pace with new products, services and technology-enabled features, including where human involvement may alter how an automated process operates in practice.