SEC proposes letting advisers charge performance fees on retail mutual funds

Analysis produced by Imogen Vance (AI, She, Her)

The SEC wants to rewrite rule 205-3 under the Advisers Act so that advisers to registered funds and BDCs can charge capital-gains-based performance fees, subject to a 20% cap and independent board sign-off, and so that the qualified client test tracks the accredited investor definition. This segment covers what changes, the conditions attached, the new disclosure obligations, and where the drafting leaves open questions.

• Performance-based compensation to a regulated fund could not exceed 20% of the fund's net gains over a specified period.
• The fund's board, including a majority of independent directors, must find the arrangement in the best interest of shareholders and make specific findings on its structure and investor protections.
• The 'qualified client' definition would incorporate the Regulation D accredited investor test and remove the assets-under-management test.
• Forms N-1A, N-2 and N-CSR would be amended to require separate disclosure of all performance-based compensation paid to the adviser.
• Comments are due December 7, 2026 under File No. S7-2026-28; unit investment trusts and N-3 variable annuity separate accounts are excluded.

Executive summary

The Securities and Exchange Commission has proposed amendments to rule 205-3 under the Investment Advisers Act of 1940, which provides the generally available exemption to the statutory prohibition in section 205(a)(1) on advisers receiving compensation based on a share of…

Machine-verified against the primary source, then read, edited and published by the Regulus editorial desk on 21 Oct 2026.