SEC enhances position allowing closed-end funds to invest in private funds

On August 15, 2025, the Division issued Accounting and Disclosure Information 2025-16 (Guidance), providing updates for registered closed-end funds that invest more than 15% of their net assets in private funds in light of this policy change. The Guidance describes the applicable disclosure and filing requirements for such funds, which are summarized below. Overall, the Guidance is in line with the public comments of Chair Paul Atkins that the Staff will focus on disclosure, particularly relating to conflicts of interest, illiquidity, and fees.

Disclosure Requirements

The Guidance highlights specific areas that the Staff will emphasize when reviewing registration statements for closed-end funds that invest more than 15% of their net assets in private funds. In addition to reiterating the requirement that disclosure should be clear, concise and understandable in compliance with the SEC’s “plain English” rules, the Guidance specifies that these registrants must provide full disclosure of their costs, strategies, and risks. The Guidance highlights the following specific focus areas for disclosure:

• Fund Structure and Investment Process: 
  • the liquidity terms of the registrant;
  • the investment process-related due diligence practices undertaken by the investment adviser in evaluating private fund investment opportunities (including investment, operational, legal, and, as applicable, tax considerations); 
• Fees and Expenses:
  • how the various fee structures imposed by the underlying private funds (including performance-related compensation) may affect the underlying fund’s returns and the registrant’s performance overall;
  • how multiple layers of direct and indirect fees will affect the returns realized by an investor in the registrant;
  • potential netting risk, meaning the effect of any underlying private fund performance fees or incentive allocations on the registrant’s performance, including the possibility that certain of the underlying private funds may receive performance fees, even if other underlying private funds or the overall performance of the registrant itself is negative; 
• Information About the Underlying Private Funds: 
  • sufficient details about the underlying private funds themselves should be disclosed, and registrants should consider providing a full discussion of the types of underlying private funds in which it proposes to invest
  • discussion of the associated risks, taking into consideration conflicts of interests, liquidity and volatile or speculative investments of the underlying private funds;
  • that the underlying private funds in which they invest (as compared to registered funds) are not limited by the 1940 Act in terms of how they invest their assets (i.e., leverage and transactions with affiliates); 
  • that the underlying private funds’ investments may impact the strategies, risks and costs of and for the registrant itself;
  • that shareholders may have limited information about the underlying private funds in which they are investing, including with respect to the underlying private funds’ holdings, liquidity and valuation; 
• Additional Potential Risks (where material):
  • the legal jurisdictions of the underlying private funds;
  • the liquidity terms for its private fund investments (such as mandatory minimum holding periods, limitations or suspensions of redemptions, etc.), including how those terms may impact the fees, performance and liquidity of the registrant itself; and
  • tax considerations when investing in private funds that produce non-qualifying income and that could impact the registrant’s status as a Regulated Investment Company under subchapter M of the Internal Revenue Code. 

Filing Requirements

Closed-end funds seeking to take advantage of this recent policy change should be aware of the appropriate registration statement filings depending on their circumstances. 

Existing registrants that have invested or seek to invest more than 15% of their assets in private funds that now wish to remove accredited investor and/or investment minimum limitations from their registration statements should assess whether those cumulative changes are material:

• If the changes are material, the Guidance advises that such funds should file a post-effective amendment pursuant to Rule 486(a) under the Securities Act of 1933, as amended (Securities Act), which filing would be subject to review and comment by the Staff.
• If the cumulative changes are not material, registrants can either file: (i) a post-effective amendment pursuant to Rule 486(b) under the Securities Act or (ii) a prospectus supplement pursuant to Rule 424 under the Securities Act, either of which would be effective immediately.

For existing closed-end funds that have abided by the 15% limitation on investments in private funds and now seek to remove that limitation, the Guidance suggests that such funds reflect these changes through a post-effective amendment filed under Rule 486(a), as the Staff views such a change as material and therefore subject to SEC review. 

Looking Ahead

This Guidance underscores the SEC’s evolution in the flexibility of closed-end funds to invest in private funds. Fund managers evaluating whether to expand a closed-end fund’s strategy to invest more than 15% of its assets in underlying private funds should carefully review the Guidance and assess any required registration statement filings to disclose this approach. Additionally, this Guidance may serve as a reference point for the disclosure obligations of funds beyond the scope of registered closed-end funds, such as business development companies, depending on their level of investment in private funds. 

Registrants that are listed closed-end funds may not be able to avail themselves of this SEC policy change, as certain exchanges have historically required closed-end funds to certify that they will not invest in private funds as part of the listing application process. However, this landscape may continue to develop, as Chair Paul Atkins has emphasized the need to provide retail investors with access to a “growing and important asset class.”

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If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.