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SEC Staff Provides Disclosure Guidance for Registered Closed-End Funds Investing in Private Funds

August 21, 2025

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The staff of the U.S. Securities and Exchange Commission (SEC) Division of Investment Management provided guidance on August 15 on disclosure expectations for closed-end funds of private funds (CE-FOPFs) that are made available to retail investors while investing more than 15% of fund assets in private funds. [1] The Accounting and Disclosure Information 2025-16 (ADI), titled “Registered Closed-End Funds of Private Funds,” follows the SEC’s lifting of the longstanding limitation restricting registered closed-end funds that are sold to retail investors from investing more than 15% of fund assets in underlying private funds, opening the door for registered funds of private funds to be offered more broadly to true retail investors.[2]

Practice Tip

CE-FOPFs desiring to take advantage of the flexibility offered by the staff’s reconsideration of its longstanding limitation on private fund investments should carefully consider the associated disclosure implications. The ADI provides helpful guidance to CE-FOPFs considering disclosure changes in connection with expanding their offering more broadly to retail investors. CE-FOPFs should re-evaluate disclosures in light of the ADI in connection with expanding their investor base to retail investors or expanding their private fund investments beyond 15%. In updating disclosures, CE-FOPFs should consider the materiality of the cumulative changes made to a registration statement and utilize the appropriate filing method for their particular circumstances.

Policy Background

The staff acknowledged that investors in CE-FOPFs generally enjoy a number of regulatory protections under the federal securities laws that differ from the safeguards afforded to direct investors in private funds. Among other protections, a CE-FOPF must be managed by a registered investment adviser that owes a fiduciary duty to the CE-FOPF and be overseen by a board of directors that likewise owes a fiduciary duty to the CE-FOPF and exercises oversight of the CE-FOPF. The ADI also notes the staff’s belief that the adviser’s fiduciary duty to the CE-FOPF additionally requires ongoing monitoring of the underlying private fund investments.

The ADI explains that CE-FOPFs are also subject to periodic disclosure requirements and a variety of protections and limitations imposed by the Investment Company Act of 1940 (1940 Act), including with respect to board governance, compliance programs, fund use of leverage, transactions with affiliates, and limits on overly complex capital structures.

Finally, the ADI specifically states that the 1940 Act’s prohibitions against certain conflicted transactions with affiliates “generally would preclude” a CE-FOPF from investing in an affiliated private fund. Note, however, that the SEC staff has on various occasions granted limited exemptive relief allowing registered funds to invest in affiliated private funds subject to a list of specific conditions.[3]

Disclosure Guidance

The ADI primarily highlights areas that the SEC’s disclosure staff will focus on when reviewing CE-FOPF registration statements. In addition to the below points, the ADI highlights that disclosures should be clear, concise and understandable, and must comply with the SEC’s “plain English” rule.

In the ADI, the SEC staff advises that CE-FOPFs should provide full disclosure of their costs, strategies and risks, and “should”:

With respect to the CE-FOPF’s liquidity terms:	“Clearly and prominently” disclose the liquidity terms of the CE-FOPF.
With respect to the CE-FOPF’s investment process:	Provide full disclosure of the investment process-related due diligence practices conducted by the adviser when evaluating private fund investment opportunities (including investment, operational, legal and, as applicable, tax considerations).
With respect to the underlying private funds in which the CE-FOPF invests:	Consider making sufficient disclosures about the underlying private funds themselves (e.g., by providing a full discussion of the types of underlying private funds in which it proposes to invest and the associated risks and considerations, including — to the extent material — the private funds’ investment strategies, risks associated with more volatile or speculative investments, conflicts of interest, and the liquidity of the private funds’ underlying investments). Disclose that the underlying private funds (as compared to registered funds) are not subject to 1940 Act limitations on how they invest, including with respect to leverage and transactions with affiliates. Disclose that the underlying private funds’ investments may impact the strategies, risks and costs of and for the CE‑FOPF itself. Disclose that shareholders may have limited information about the underlying private funds in which the CE‑FOPF is investing, including with respect to the underlying private funds’ holdings, liquidity and valuation. Where material, consider disclosing risks relating to the legal jurisdictions of the underlying private funds. Where material, disclose risks relating to the “liquidity terms” for the CE-FOPF’s private fund investments (such as mandatory minimum holding periods, limitations or suspensions of redemptions, and the possibility of “payment in kind” distributions in response to a redemption request) and explain how these terms may impact the fees, performance and liquidity of the CE-FOPF. Where material, disclose risks relating to tax considerations when investing in private funds that produce non-qualifying income and that could impact the CE-FOPF’s pass-through status as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code.
With respect to fees and expenses:	Describe the various fee structures imposed by the underlying private funds (including performance‑related compensation) and discuss how those fees could affect the underlying private funds’ returns and the CE-FOPF’s performance. Disclose how multiple layers of direct and indirect fees will affect the returns realized by an investor in the CE-FOPF. Consider disclosing the effect of any underlying private-fund performance fees or incentive allocations on the CE‑FOPF’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 CE‑FOPF itself — is negative (i.e., “netting risk”).

Filing Process for Existing Funds Adapting to This New Flexibility

In addition to providing the above guidance regarding substantive disclosures, the ADI also indicates the SEC staff’s expectations for existing funds that wish to take advantage of this newly afforded flexibility.

For existing funds that have invested (or seek to invest) more than 15% of their assets in private funds and have removed, or are now seeking to remove, accredited investor and/or investment minimum shareholder limitations from their registration statements:

The SEC staff advises that the appropriate path for a CE-FOPF depends on whether the cumulative changes, including any changes made in addition to removing the accredited investor and investment minimum shareholder limitations, are material (inferring that alone, such changes may not be material).

If the cumulative changes are material, the SEC staff advises that CE-FOPFs should file a post‑effective amendment pursuant to Rule 486(a) under the Securities Act of 1933 (1933 Act). Such a filing would be subject to review and comment by the SEC staff and would not become effective until at least the 60th day after submission.
If the cumulative changes are not material, CE-FOPFs can either file a post‑effective amendment pursuant to Rule 486(b) under the 1933 Act or a prospectus supplement pursuant to Rule 424 under the 1933 Act. Such filings would be immediately effective.

For existing funds that have not imposed accredited investor and/or investment minimum shareholder limitations in their registration statements and now seek to remove a 15% limitation on investments in private funds:

The SEC staff advises that such funds reflect such changes through a post‑effective amendment filing under Rule 486(a), as the staff believes such a change is material and should be subject to review. As noted above, such a filing would be subject to review and comment by the SEC staff and would not become effective until at least the 60th day after submission.

Some Important Points of Clarification

No Change for Listed Closed-End Funds (Yet): The changes discussed herein relate to a position previously taken by the staff of the SEC’s Division of Investment Management that affects unlisted closed-end funds. Notwithstanding these recent developments, listed closed-end funds continue to be required by various exchanges (and indirectly by the SEC’s Division of Trading and Markets) to make a representation as part of the listing application process that they will not invest in underlying private funds. That said, in remarks delivered earlier this year, SEC Chairman Paul Atkins did allude to a willingness to open the door for listed closed-end funds of private funds.[4]

Open-End Funds Remain Subject to the 1940 Act’s 15% Limitation on Illiquid Investments: Separate from the now-lifted restriction on retail closed-end funds’ investments in underlying private funds, open-end funds are subject to the limitation in Rule 22e-4 under the 1940 Act (which does not apply to closed-end funds), which prohibits open-end funds from acquiring any illiquid investment if, immediately after the acquisition, the fund would have invested more than 15% of its net assets in illiquid investments. While not all private funds are necessarily illiquid, the vast majority are, which effectively continues to practically limit the ability of open-end funds to invest in private funds.

The 15% Limitation Recently Lifted by the SEC Staff and Addressed in the ADI Was a Limitation on Investments in Private Funds, Not All Private Assets: Importantly, registered funds have been, and continue to be, permitted to invest in private assets generally, provided that such investments are otherwise made in compliance with the provisions of the 1940 Act.

[1] Section 202(a)(29) of the Investment Advisers Act of 1940 defines the term “private fund” as an issuer that would be an investment company, as defined in Section 3 of the Investment Company Act of 1940 (1940 Act), but for Section 3(c)(1) or 3(c)(7) of the 1940 Act. References herein to “private funds” should be read accordingly.

[2] Specifically, the SEC’s disclosure staff will no longer require that registered closed-end funds either (1) restrict investment to accredited investors and impose minimum investment requirements or (2) limit their own investments in private funds, with certain limited exceptions (e.g., certain infrastructure private funds), to 15% of the registered fund’s assets.

[3] See, e.g., Principal Funds, Inv. Co Act Rel. No. 33843 (April 21, 2020) (Notice) and Inv. Co. Act Rel. No. 33886 (May 20, 2020) (Order).

[4] Paul S. Atkins, “Prepared Remarks Before SEC Speaks” (May 19, 2025) (“We must consider and resolve important disclosure issues for these products, particularly for those that trade on exchanges, including conflicts of interest, illiquidity and fees.” (Emphasis added.)).