Since the enactment of the Investment Company Act 85 years ago, the asset management industry has grown from $2 billion in assets to more than $39 trillion in assets. Under existing Securities and Exchange Commission (“SEC”) rules, retail investors and lesser-capitalized institutions who do not qualify as accredited investors or qualified purchasers are almost shut out from investing in private funds. However, statements made by SEC Chairman Paul S. Atkins on May 19, 2025, and by Natasha Vig Greiner, the SEC’s Director of the Division of Investment Management, on June 5, 2025, indicate that retail investors may soon have increased access to private equity funds that invest in other private equity funds, potentially offering a more diversified portfolio.
The Fund of Funds Investment Explained
A single private equity fund investment typically involves the fund executing a specified strategy and acquiring certain asset classes that fit that strategy. In contrast, a purchaser of a fund of funds (“FoF”) investment acquires an interest in one private equity fund that then purchases shares in another private equity fund instead of in the individual stocks or private assets. In addition to asset diversification which investment in a single private equity fund generally provides, a FoF investment may also benefit investors with manager, strategy, and geographic diversification.
However, FoF investing also poses unique risks not applicable to single fund investments. Specifically, whereas single fund investments generally disclose the type of assets being acquired, the applicable industry, and the identity and background of the fund managers, FoF investors may not be informed of even the specific funds in which the FoF invests, let alone the specific investment objectives, investment types, the managers of each individual fund, and other common disclosures. FoF investors’ capital may also face longer lock-up periods than traditional single fund investors. The fees assessed against the FoF investors’ capital may also be greater than those against the single fund investors as both the individual manager of the individual funds in the portfolio and the FoF manager may be assessing fees.
The Investment Company Act of 1940 and Prior SEC Staff Limitations on Retail Investment in FoF Investments
Unless an investor qualifies as an “accredited investor” under existing SEC rules, private fund investment is generally foreclosed from retail investors. Although certain retail closed-end funds that have registered with the SEC may invest in another private fund under the Investment Company Act, such investment has previously been limited to 15% of the fund’s net assets. Otherwise, SEC staff limited such offering to only “accredited investors” under Rule 501 of Regulation D and whose initial investment was $25,000. This requirement was usually disclosed to closed-end funds during the SEC staff review of the fund’s registration statement disclosures, was not imposed by any statute, regulation, or SEC comment, and effectively prevented retail investment in FoFs as most retail investors do not satisfy the net worth or income requirements for “accredited investor” status.
What Atkins, Greiner Said About the Potential Expansion of Retail Access to FoF Investments
Chairman Atkins provided the first indication that retail investors may soon have greater access to the FoF investment vehicle this past May while speaking at the “SEC Speaks in 2025” conference. Atkins first noted that the SEC staff requirements discussed above had effectively blocked most retail investors from investing in closed-end funds that hold private investment funds, and then stated:
With this in mind, I intend to have the Commission address this situation and reconsider this 23-year-old practice concerning investments by closed-end funds in private funds. This common-sense approach will give all investors the ability to seek exposure to a growing and important asset class, while still providing the investor protections afforded to registered funds. 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.
Following on Atkins’s heels, Greiner then spoke in June at the Conference on Emerging Trends in Asset Management in Washington, D.C. After discussing the history of investor protection as a result of the Investment Company Act, Greiner identified the federal securities laws’ current limitations on retail investment in private equity funds to only accredited investors or high net worth individuals and then signaled the SEC’s potential opening of the investment door in retail investment in closed-end funds through the following comments:
[C]losed-end funds can offer retail investors greater exposure to less-liquid asset classes, such as private fund investments, while still subject to the protections of the Investment Company Act and management by a registered investment adviser. With this in mind, we are working with registrants on an appropriate path forward with respect to the potential of further opening this channel to retail investors. Our understanding of private markets has increased significantly over the past several years, as have disclosure practices by both registered and private funds. As a result, I believe it is appropriate to consider under what circumstances private fund investments should be available to investors who are not accredited investors or qualified purchasers, through these registered fund vehicles. That said, robust disclosure is appropriate for funds that are available to retail investors and that invest in complex assets like private funds. Our disclosure staff is diligently working with issuers that want to offer private fund-of-fund products, ensuring that their disclosures are tailored to retail investors. I ask that issuers reach out to their IM reviewers and have patience as we work through these disclosure issues.
Takeaways
As a result of the SEC potentially changing course in enforcing the rules related to FoF investments, the following takeaways emerge:
- Private equity funds that invest in other private funds will no longer have to limit their investors to only accredited investors if more than 15% of fund assets are used to invest in other private offerings.
- Such funds will also no longer have to impose a $25,000 minimum investment and will be able to rely on the aforementioned guidance once offering documents are updated.
- Without the above investment requirements imposed by the accredited investor limitations, retail investors may enjoy greater private market exposure, including the new ability to invest retirement accounts in FoF offerings.
- However, should this policy shift occur, FoFs may face an increase in litigation by retail investors alleging lack of suitability, incomplete fund disclosure, conflicts of interest, and liquidity concerns. In addition, investment advisors recommending such FoF investments may also face more claims related to breach of fiduciary duties and claims based on the accuracy of such advisors’ representations.
Finally, this shift in policy may close the gap between institutional and retail investment opportunities while maintaining transparency, oversight, and risk disclosure. The relaxation of the SEC’s 15% limitation may also enhance retail investors’ access to more diversified portfolios, increase long-term return potential, and forward growth of private markets without sacrificing the investor protections afforded by registered funds.
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