Key Highlights

• The Securities and Exchange Commission (the “SEC”) staff recently announced that the Division of Investment Management (the “Division”) will no longer require registered closed-end funds that invest in private funds (“CE-FOPFs”) to (i) limit private fund investments to 15% of assets or (ii) restrict their offerings to “accredited investors”¹ with minimum $25,000 initial investments.
• This change, reflected in Accounting and Disclosure Information (ADI) 2025-16, ends a practice in place since 2002 that effectively constrained retail investor access to private fund strategies.
• The ADI 2025-16 guidance follows remarks by SEC Chairman Paul S. Atkins and Natasha Greiner, then-director of the Division,² who emphasized that the regulatory landscape has evolved and retail investors should have broader access to private funds subject to disclosure and structural protections under the Investment Company Act of 1940, as amended (the “1940 Act”).
• Going forward, CE-FOPFs must carefully consider enhanced disclosure on fees, risks, liquidity, and conflicts of interest when preparing or amending registration statements.
• Legislative efforts, including the Increasing Investor Opportunities Act, may codify this change and may make the policy shift permanent.

Background

On August 15, 2025, the Division issued a guidance in ADI 2025-16. According to ADI 2025-16, when reviewing CE-FOPF registration statements, the SEC staff will no longer provide comments requesting registrants to either (i) include “accredited investor” status and minimum initial investment requirements or (ii) limit private fund investments to 15 percent of a fund’s assets. This latest guidance marks a pivotal and welcome shift in the treatment of CE-FOPFs in registration reviews after over two decades of established practice.

Since the first CE-FOPF registration statement was filed in 2002, the SEC staff has required closed-end funds investing 15% or more of assets in private funds (i.e., funds relying on Sections 3(c)(1) or 3(c)(7) of the 1940 Act) to:

• restrict their offerings to investors who qualified as “accredited investors” under Rule 501(a) of Regulation D; and
• impose a minimum initial investment of $25,000.

These conditions were not required either by statute or rule. Rather, they were applied informally through the SEC staff’s registration statement disclosure review process. Without agreement to these limitations, CE-FOPFs could not receive acceleration of effectiveness.

Changes in the Regulatory Landscape

At the May 2025 “SEC Speaks” conference, Chairman Paul Atkins signaled a decisive shift and called for a reassessment of the two-decade-old practice. Chairman Atkins explained, “Financial innovation sometimes means getting out of the way of capital formation and allowing all investors to gain the benefits of our robust markets.”³  He added that since 2002, the 15% policy had prevented retail closed-end fund investors from accessing opportunities in CE-FOPFs.

Chairman Atkins noted that the private markets have grown significantly, with assets nearly tripling from $11.6 trillion to $30.9 trillion in the past decade alone.  He added that oversight of private fund advisers has expanded, including registration and reporting requirements that did not exist when the 15% policy was first adopted.

Chairman Atkins called for ending the “23-year-old practice,” and framed the change as a “common-sense approach” that would balance financial innovation with investor protection. He also explained that the investors could pursue diversification in line with their time horizon and risk tolerance, while still benefiting from the protections afforded to registered funds.

On May 20, 2025, Ms. Greiner confirmed that the SEC staff will no longer issue comments imposing the 15% cap or accredited investor requirement during registration reviews. She stressed that the Division will:

• Work collaboratively with filers as new products come to market.
• Continue to scrutinize disclosure on conflicts of interest, liquidity, and fees.
• Encourage early engagement with SEC staff on product design and filings.

This position was confirmed in ADI 2025-16, discussed above, which provided more clarity to registrants and market participants.

Current Regulatory Protections for CE-FOPF Investors

While CE-FOPFs will provide indirect access to private funds, investors continue to benefit from 1940 Act safeguards, including:

• Oversight by a board of directors with fiduciary obligations.
• Management by a registered investment adviser owing a fiduciary duty.
• 1940 Act protections, including limits on excessive leverage, governance requirements, limits on overly complex capital structures, and restrictions on affiliate transactions.
• Liability for material misstatements or omissions in SEC filings.

These protections remain central to the SEC’s rationale for broadening retail access.

Continued Disclosure Focus for CE-FOPF Registration Statements

CE-FOPFs must still provide meaningful disclosure and maintain robust governance frameworks. ADI 2025-16 contains the following SEC staff disclosure comments concerning CE-FOPFs and their Form N-2 registration statements:

General

• • Disclosures must be clear, concise, and in plain English, in line with regulatory requirements.
  • Registration statements must meet all Form N-2 requirements, including disclosures on fees, strategies, risks, and adviser due diligence practices (investment, operational, legal, tax).
  • Liquidity terms should be disclosed clearly and prominently.

Fees and Costs

• • Underlying fund fees, including performance fees, and their potential impact on underlying private funds’ returns and a CE-FOPF’s performance must be clearly disclosed.
  • Multiple layers of fees that could affect CE-FOPF performance need to be explained. In particular, “netting risk,” where performance fees may be paid despite overall fund underperformance need to be addressed.

Underlying Private Funds

• • The types of private funds held by a CE-FOPF and associated risks must be described (e.g., volatility, conflicts of interest, liquidity).
  • The fact that underlying funds are not limited by the 1940 Act (e.g., limits on leverage or affiliate transactions) must be explained.
  • Disclosures must include that investments in these private funds can directly influence the strategy, risk profile, and costs of a CE-FOPF.
  • Disclosures must include that investors may have limited information about underlying private funds’ holdings, liquidity, or valuation.

Additional Risk Disclosures (Where Material)

Risks tied to:

• • Legal jurisdictions of the underlying private funds;
  • Liquidity restrictions (e.g., lockups, suspended redemptions, payment in kind); and
  • Tax implications related to non-qualifying income from private funds, which could impact a CE-FOPF’s ability to maintain its status as a Regulated Investment Company (RIC) under subchapter M of the Internal Revenue Code.

Filing and Other Regulatory Implications

ADI 2025-16 details the appropriate filing process for existing CE-FOPFs seeking to adjust investor limits or asset exposure thresholds. Depending on the nature of the proposed changes, CE-FOPFs should:

1. file amendments to their registration statements pursuant to Rule 486(a) or (b)⁴ under the 1933 Act; or
2. file prospectus supplement updates pursuant to Rule 424 under the 1933 Act, as appropriate.

ADI 2025-16 encouraged CE-FOPFs to review the materiality of updates to their registration statement to determine the appropriate filing process.  ADI 2025-16 noted that the changes deemed material may trigger SEC staff review under Rule 486(a).

The SEC staff’s latest guidance is likely to result in heightened scrutiny of affiliate relationships and potential scrutiny of affiliate conflicts of interest under Section 17(a) and Section 17(d) of the 1940 Act. Transactions subject to Section 17(a), including dealings with closed-end funds and first- and second-tier affiliates of a fund, are likely to face careful review as the ADI 2025-16 guidance emphasizes the need for clear disclosures, fair terms, and careful oversight.  Similarly, joint transactions under Section 17(d) may attract additional review to ensure proper oversight and governance. Although the SEC has recently liberalized certain conditions for joint transactions⁵, CE-FOPFs should carefully assess affiliate status and potential conflicts of interest as their exposure to existing or new private fund securities increase.

Legislative Developments

On June 25, 2025, the House Financial Services Committee reported the Increasing Investor Opportunities Act to the full House. If enacted, the legislation would prohibit the SEC from imposing any limitations on closed-end funds’ investments in private funds beyond those already required by the 1940 Act. This would make the SEC’s current policy shift permanent and could provide long-term regulatory certainty to fund managers and investors.

Conclusion

The SEC staff’s removal of the 15% limit and related restrictions through ADI 2025-16 marks a significant evolution in the regulation of CE-FOPFs and reflects the SEC staff’s willingness to expand access to private markets while maintaining investor protections through disclosure and oversight.

Fund managers should carefully review ADI 2025-16 and engage with SEC staff to ensure compliance with disclosure requirements.

Seward & Kissel LLP will continue to provide insight on any related developments.

* * * * *

If you have any questions regarding the foregoing, please contact your Investment Management Group attorney at Seward & Kissel LLP.