Investment Adviser Performance-Based Compensation Modernization
AI Analysis
The SEC published a proposed rule on October 6, 2026, that would materially broaden when SEC-registered investment advisers may receive performance-based compensation. The proposal would permit qualifying regulated funds to pay performance compensation subject to a 20% cap and governance conditions, and would generally treat Regulation D accredited investors as qualified clients, potentially expanding access to performance-fee arrangements beyond the current $2.7 million net-worth or $1.4 million assets-under-management thresholds.
Key dates
- 2026-10-06
- The proposed rule was published in the Federal Register at 91 FR 63676 and the comment period opened.
- 2026-12-07 Deadline
- Comments on the proposed rule are due to the SEC.
Suggested considerations
- Compliance teams may wish to determine whether existing or proposed fund products could use the regulated-fund performance-compensation pathway and map each arrangement against the proposed 20% net-gains cap, specified-period methodology, governance requirements, and board-determination condition.
- Advisers and fund sponsors should consider inventorying current performance-fee arrangements and identifying clients who could become eligible under the proposed accredited-investor route, without treating the proposal as authority to implement changes before adoption and an applicable compliance date.
- Fund sponsors may wish to assess the operational and disclosure impact of separately reporting performance-based compensation in Forms N-1A, N-2, and N-CSR, including fee-table, prospectus, financial-reporting, and board-material changes.
- Adviser compliance programs should consider reviewing Rule 205-3 eligibility controls, investor-classification procedures, accredited-investor evidence, client look-through analysis, and controls for the related Rule 203A-3, Rule 204-3, and Form ADV amendments.
- Fund boards and advisers may wish to evaluate how performance-fee proposals would affect fiduciary-duty analysis, conflicts management, valuation, incentive alignment, investor communications, and approval documentation.
- Affected firms should consider submitting comments by December 7, 2026, particularly on the 20% cap, specified performance period, governance conditions, disclosure design, accredited-investor eligibility, and transition or compliance-period issues.
What changed
Proposed amendments to Investment Advisers Act Rule 205-3 would create an additional route for registered investment advisers to receive compensation based on capital gains or capital appreciation from registered management investment companies and business development companies, collectively referred to as regulated funds. The proposed regulated-fund arrangement would be subject to conditions including a performance-based compensation amount not exceeding 20% of the fund's net gains over a specified period, compliance with applicable fund governance standards, and a determination by the fund's board of directors. The proposal would amend Forms N-1A, N-2, and N-CSR to require separate disclosure of performance-based compensation paid by a regulated fund to its investment adviser, including
Compliance impact
This is a proposed rule rather than a currently effective expansion of performance-fee authority, so it does not presently change firms' eligibility to charge performance-based compensation. If adopted substantially as proposed, it would create significant implementation work for adviser eligibility controls, fund-board oversight, valuation and fee calculations, prospectus and reporting disclosure
Who is affected
Related regulations
References
AI-generated analysis. May contain errors or omissions — verify with the original SEC source before acting. Full disclaimer.
What the SEC said
Proposed rule. The Securities and Exchange Commission (the "Commission") is proposing to amend the rule under the Investment Advisers Act of 1940 that provides an exemption from the statutory prohibition on registered investment advisers receiving compensation on the basis of a share of capital gains in or capital…
Extract from SEC . Read the full notice at the source for the authoritative text.