As previously described in a May Ropes & Gray Alert, the SEC staff no longer requires retail closed-end funds to limit their investments in private funds – i.e., funds relying upon Sections 3(c)(1) or 3(c)(7) of the 1940 Act (“private funds”) – to 15% of their net assets.1
On August 15, 2025, the Division of Investment Management (the “Division”) issued ADI 2025-16, titled “Registered Closed-End Funds of Private Funds” (the “Guidance”). The Guidance provides important updates for retail registered closed-end funds that invest more than 15% of their net assets in private funds (“CE-FOPFs”), including clarification of regulatory protections, disclosure expectations, and filing requirements.
The Guidance is summarized below.
Basic Regulatory Protections
The Guidance emphasized that, under the federal securities laws, investors who invest indirectly in private funds through CE-FOPFs are afforded regulatory protections that “differ from the safeguards afforded to direct investors in private funds.” CE-FPOFs are subject to the requirements of the 1940 Act, which are “designed to protect investors, including with respect to board governance, mandatory compliance programs, limits against excessive leverage, and limits on overly complex capital structures.” Additionally, the 1940 Act prohibits certain conflicted transactions with affiliates, which the Guidance notes “generally would preclude a registered closed-end fund from investing in an affiliated private fund.”
Disclosure Requirements
The Guidance underscored areas that the SEC staff, when reviewing CE-FOPF registration statements, would focus on:
- Costs, Strategies, and Risks. Consistent with the Form N-2 requirements applicable to all closed-end funds, a CE-FOPF should provide full disclosure of its costs, strategies, and risks, “as well as the investment process-related due diligence practices conducted by the adviser when evaluating private fund investment opportunities.” Moreover, the liquidity terms of the CE-FOPF also should be disclosed clearly and prominently.
- Fee Structures and Performance Impact. CE-FOPFs should describe the various fee structures imposed by the underlying private funds, including any performance-related compensation, as well as how those fees could affect the underlying private funds’ returns and the CE-FOPF’s performance. A CE-FOPF should also disclose how multiple layers of direct and indirect fees will affect the returns realized by an investor in the CE-FOPF, including the possibility that certain of the underlying private funds may receive performance fees, while other underlying private funds “or the overall performance of the CE-FOPF itself – is negative.”
- Underlying Private Fund Strategies. CE-FOPFs should consider disclosures about the underlying private funds’ strategies and risks. The Guidance noted that, in its strategy and risk disclosures, a CE-FOPF should provide a full discussion of the types of underlying private funds in which it proposes to invest and the associated risks and considerations, including “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.”
- Different Regulatory Protections. CE-FOPFs should disclose that (i) the underlying private funds in which they invest are not “limited by the 1940 Act in how they invest their assets,” which includes the private funds’ use of leverage and transactions with affiliates, (ii) the underlying private funds’ investments may impact the strategies, risks, and costs of the CE-FOPF itself, and (iii) shareholders may have limited information about the underlying private funds in which the CE-FOPF invests.
SEC Filing Requirements
The Guidance stated that CE-FOPFs that currently invest over 15% of their net assets in private funds may seek to remove existing accredited investor and/or minimum initial investment requirements from their registration statements by (i) filing amendments to their registration statements through Rule 486(a)-(b) under the Securities Act, or (ii) filing prospectus supplement updates through Rule 424 under the Securities Act.
Closed-end funds that currently limit private fund exposure to 15% of net assets and never imposed accredited investor and/or minimum initial investment requirements in their registration statements and now seek to remove the 15% limitation should make such changes through a post-effective amendment filing under Rule 486(a) because the SEC staff views such a change as material.
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