SEC Policy Change for Closed-End Funds Will Enhance Individual Access to Private Markets Investments

At a Glance

• The SEC policy change does not resolve every potential complication or consideration when investing retirement assets in private markets funds, but it is a significant move toward enhancing access and simplifying the process for investors desiring private markets exposure.
• As a large portion of the investing public does not satisfy the net worth or income requirements for “accredited investor” status, the discontinuance of the restriction will significantly expand the pool of eligible investors for closed-end funds having a focus on private markets investments.
• For advisers who are seeking to manage a fund-of-funds vehicle that invests in private funds, potentially with significant participation from benefit plan investors, a registered closed-end fund likewise may offer certain advantages.

Recent public statements by Paul Atkins, chair of the Securities and Exchange Commission (SEC), and Natasha Greiner, director of the SEC’s Division of Investment Management, described an important policy shift that should help to enhance individual access to private markets investments, including potentially for 401(k) and other defined contribution plan investors, as well as individual retirement account (IRA) owners. The announced changes apply to registered closed-end funds that in turn invest their assets in private funds. (“Private funds” being those relying on the 3(c)(1) or 3(c)(7) exemptions.)

Previously, the SEC staff had required closed-end funds that wanted to invest more than 15% of their net assets into private funds to require their investors to be “accredited investors” (as defined in SEC Rule 501 adopted under Regulation D) and to require an initial investment of at least $25,000.¹ For individuals, “accredited investor” status currently requires either a net worth of $1 million (excluding the positive value of the individual’s primary residence) or an annual income requirement of $200,000 ($300,000 with a spouse or domestic partner) in each of the prior two years, with a reasonable expectation of the same earnings in the current year.

While longstanding, the staff’s prior policy was not without controversy. Most notably, despite being in place for over two decades it was never formally adopted in any SEC regulation or published rule; rather it was an informal staff position that was communicated during the registration statement review process. Further, while the 15% threshold was initially imposed with respect to all underlying private fund holdings of a closed-end fund registrant, the staff later shifted their policy to apply the limitation only with respect to certain types of underlying private fund investments — in particular private equity and hedge funds — but not to other types of private funds relying on the same private fund exemptions.

At a conference organized by the Practising Law Institute, Chairman Atkins confirmed on May 19, 2025, that the above SEC staff policy would no longer be imposed, noting that it has caused individual investors to miss out on opportunities to invest in closed-end funds providing access to private markets. This shift of position was confirmed by statements made the next day by Director Greiner.

In short, effective May 19, registered closed-end funds that do not explicitly limit their private fund exposure to the 15% threshold will now be able to invest in private funds without limiting their investor base to accredited investors or imposing the $25,000 minimum investment requirement. Funds that have imposed the 15% exposure limit in their prospectuses will need to go through a prospectus update before they can rely on this new guidance. As a large portion of the investing public does not satisfy the net worth or income requirements for “accredited investor” status, the discontinuance of the restriction will significantly expand the pool of eligible investors for closed-end funds having a focus on private markets investments.

In addition to “direct” individual investments, it will likewise make these funds more accessible to IRA and similar retirement account investors, as the accredited investor and other eligibility requirements imposed under SEC rules often “look through” the IRA or plan account to the underlying beneficial owner.

What This Means for Individual Investors

For individuals desiring exposure to private markets, including through retirement accounts, the ability to do so indirectly through a registered fund has a number of distinct advantages. First and foremost, the investor eligibility standards for direct investments in private funds typically include at least the “accredited investor” requirement, and often, more arduous standards including the “qualified purchaser” limitation (which requires an individual to own $5 million in investments) that is imposed for 3(c)(7) funds. Even for those who meet the applicable standards, investing in a registered closed-end fund may often provide access to a better-diversified portfolio of private markets investments, as compared to direct private fund investments where minimum investment requirements may preclude the same degree of diversification. And of course, many investors are likely to prefer having a registered fund’s manager be responsible for due diligence and selection of the ultimate private fund vehicles.

What This Means for Employer-Sponsored Plans

For 401(k) and other employer-sponsored plans that permit individuals to select their account investments, the SEC has issued no-action relief addressing when 3(c)(1) and 3(c)(7) funds can avoid the need to “look through” to each individual beneficial owner (that is, when private funds relying on these exemptions can treat the plan itself as the investor in the fund) for purposes of applying certain investor eligibility requirements and other limitations. These SEC no-action letters provided a model under which 401(k) and other participant-directed plans can incorporate private funds (i.e., that plan participants would not necessarily be eligible to buy on their own) into broader, “generic” plan-level investment options, subject to a number of limitations and requirements.

While this type of model remains a viable alternative, it may be out of reach for smaller plans and plan sponsors. For one thing, some small plans themselves may not satisfy the eligibility requirements for nonretail investors, or the investment minimums imposed, for direct private fund investments. Even where a plan is eligible and able to invest, building customized investment options at the plan level that invest in private funds may present more costs and administrative burdens than many employers are willing to take on, unless they have sufficient resources to maintain their own in-house investment teams. Again, accessing private markets funds indirectly through a publicly offered registered fund is an easier and simpler alternative.

What This Means for Investment Advisers

For advisers who are seeking to manage a fund-of-funds vehicle that invests in private funds, potentially with significant participation from benefit plan investors, a registered closed-end fund likewise may offer certain advantages. Under the Employee Retirement Income Security Act of 1974 (ERISA) and the Department of Labor (DOL) “look-through” plan assets regulation, the underlying assets of a registered investment company are not deemed to constitute “plan assets” irrespective of how much of the fund is held by benefit plan investors, whereas under a “private fund-of-private funds” structure, avoiding plan assets status would generally require the participation of benefit plan investors in each class of equity interests to be maintained below 25% at all times. Without limitation, avoiding look-through “plan assets” status means that the fund’s adviser is not acting as an ERISA fiduciary when managing the fund’s assets, and thus is not exposed to potential fiduciary liability under ERISA and is not required to navigate the complex prohibited-transaction rules when investing fund assets and otherwise dealing with fund counterparties.

In Conclusion

The SEC policy change does not resolve every potential complication or consideration when investing retirement assets in private markets funds (including restrictions that limit a target date fund organized as an open-end registered investment company from investing significantly in such closed-end fund), but it is a significant move toward enhancing access and simplifying the process for investors desiring private markets exposure.

It is also notable that the DOL itself appears to be moving in the direction of facilitating greater access for ERISA 401(k) and other defined contribution plans to traditionally “alternative” asset classes. For example, in a recent Compliance Release, the DOL rescinded a 2022 release from the agency that had cautioned plan fiduciaries to exercise “extreme care” when considering cryptocurrency investment options for plan participants, indicating a current viewpoint that ERISA’s fiduciary standards should be applied on a neutral basis as to investments in different asset classes. More broadly, the Trump administration’s nominee to head the DOL’s Employee Benefits Security Administration, Daniel Aronowitz, indicated at his confirmation hearing before the Senate’s Health, Education, Labor and Pensions (HELP) Committee that if confirmed he would work to provide regulatory clarity on a number of matters, including to “moderniz[e] defined contributions plans to include alternative investments, such as private equity and cryptocurrency.”