On August 7, President Trump signed Executive Order 14330, titled “Democratizing Access to Alternative Assets for 401(k) Investors.” The order states that the SEC shall “consider ways to facilitate access to investments in alternative assets by participants in participant-directed defined-contribution retirement savings plans. Such facilitation may include, but not be limited to, consideration of revisions to existing SEC regulations and guidance relating to accredited investor and qualified purchaser status, to accomplish the policy objectives of this order.” For additional analysis of this executive order, see our prior articles, “New Kids on the Blockchain: Cryptocurrencies in 401(k) Accounts” and “Plan Sponsor and Asset Manager Considerations Under 401(k) Alternatives Executive Order.”
The executive order defines “alternative assets” broadly enough to include, among many other things, closed-end funds (CEFs) that, in turn, invest in private investment funds. CEFs are SEC-registered investment companies that are similar to mutual funds, except that investors cannot freely redeem their shares at a CEF’s net asset value at any time. Although private funds may invest in securities, such funds (a) do not publicly offer their own securities and (b) limit the number or qualifications of their security holders in order to qualify for exemptions from registration under the Investment Company Act of 1940 and the Securities Act of 1933. Private funds include private equity, private credit, and hedge funds.
The shares of many CEFs are traded in public markets where everyday nonaccredited investors can purchase them. But CEF shares can also be offered, for example, as investment options under defined-contribution retirement savings plans. Accordingly, CEFs may be an important type of vehicle through which plan participants can have a significant indirect interest in private funds.
SEC Staff’s Evolving Position
For more than two decades, the ability of CEFs to invest in private funds was limited by guidance from the staff of the SEC’s Division of Investment Management. That position held that if a CEF invested 15% or more of its assets in private funds, all of the CEF’s investors had to be accredited investors under SEC Regulation D, each of whom initially invested at least $25,000 in the CEF.
On August 15, however, the staff issued Accounting and Disclosure Information 2025-16, titled “Registered Closed-End Funds of Private Funds,” which formally withdrew this position and provided further guidance. Despite this development, certain securities exchanges on which CEF shares are commonly listed have not yet changed their requirements that CEFs, as part of their listing applications, represent they will not invest in private funds.
The staff’s revised position could substantially increase the number of CEFs that invest a large portion of their assets in private funds and that are available to defined-contribution plans. This change furthers the purposes of the executive order, even though the ADI does not reference the executive order directly or mention defined-contribution plans. The SEC staff, however, has been in the process of reconsidering its position on CEF investment in private funds since much earlier this year. In a May 19, 2025, speech, SEC Chair Paul Atkins said he intended for the commission to revisit its position. Atkins also referred specifically to exchange-traded CEFs in a way that suggested he wanted securities exchanges to reconsider their restrictive listing requirements.
Possible Additional Protections for Plan Participants Investing in CEFs
The executive order recognized that “[f]iduciaries of 401(k) and other defined-contribution retirement plans must carefully vet and consider all aspects of private offerings, including investment managers’ capabilities, experiences, and effectiveness managing alternative asset investment,” and that “[t]hey do so to protect the Americans whose retirement accounts they administer and for whom they have fiduciary duties to invest safely and prudently.”
The ADI cites several protections for investors in CEFs that invest in private funds. These protections may exceed those applicable to other vehicles available to defined-contribution plans. Among the cited requirements are:
- Management by an SEC-registered investment adviser, which owes a fiduciary duty to the fund.
- Oversight by a board of directors, which also owes a fiduciary duty to the fund.
- Periodic disclosures, with liability for material omissions and misstatements.
The ADI also cites the applicability in the CEF context of extensive requirements under the Investment Company Act with respect to:
- Board governance.
- Mandatory compliance programs.
- Limits against excessive leverage.
- Limits on overly complex capital structures.
- Prohibitions on certain conflicted transactions with affiliates, which, among other things, generally would preclude a CEF from investing in an affiliated private fund.
The ADI further lists disclosures that should be included in SEC registration statements for CEFs investing in private funds. These disclosures include considerable information about the underlying private funds in which a CEF invests.
Finally, the ADI discusses the manner in which CEFs should file any revisions to their SEC registration statements as a result of the staff’s new position. For example, a CEF that previously capped private fund exposure at 15% and did not impose accredited investor or investment minimum requirements in its registration statement but now seeks to remove the 15% cap should file a post-effective amendment under Securities Act Rule 486(a). This ensures the changes will be reviewed by SEC staff. In other cases, whether a filing will require staff review should be considered on a case-by-case basis.
Takeaways
CEFs that invest in private funds — or wish to do so — should carefully review the SEC staff’s guidance on registration statement disclosures and filing procedures in ADI 25-16. The protections identified in the ADI, combined with registration statement requirements and SEC staff oversight, may carry significant weight with fiduciaries of defined-contribution plans. In some cases, these protections may be the deciding factor in whether fiduciaries approve a CEF as an investment option.
