Good morning, ladies and gentlemen, and thank you for joining us today for this public meeting of the Securities Exchange Commission under the Government in the Sunshine Act. We have three items on today's agenda. First, the Commission will consider whether to issue a release proposing rule amendments expanding the circumstances under which a registered investment advisor may receive performance-based compensation. Second, we should consider whether to issue a release proposing amendments to the rule that allows regulated closed-end funds to make repurchase offers to shareholders at net asset value at periodic intervals. And then finally, we'll consider whether to issue five notices that the Commission is considering regarding whether to designate by order certain certifications, designations or credentials as qualifying natural persons for accredited investor status.
But before we begin, I should like to take a point of personal privilege and take a moment to recognize my very good dear friend and colleague, Commissioner Hester Peirce. As her remarkable tenure at the Commission draws to a close, I thank her for her nearly nine years of principled leadership and dedicated public service as a Commissioner. Even before her tenure as Commissioner, she served the SEC in the Division of Investment Management and then in my office. Unfortunately for her, when I was a commissioner, that was a great pleasure. One of the most attractive aspects to me in returning to the Commission as Chairman was the opportunity to work again with Commissioners Peirce and Uyeda, who was also in my office back in the arts. We were able to bring the band back together. So that's what a great pleasure has been for the last 17 months.
Commissioner Peirce has always brought an independent mind to the work of the Commission. She has never been afraid to question conventional wisdom or to stand alone when principle demanded it. At the heart of her approach has been a deep respect for investors, particularly for their judgment, their freedom to participate in our markets, and for their right to benefit from the opportunities that those markets create. Nowhere has her courage to stand apart from the crowd proven more consequential than in the area of digital assets. Long before regulatory clarity became a shared objective at the Commission, Commissioner Peirce was calling for it. She, of all people, truly deserves the nickname of Crypto Mom. Many of the ideas that we are now putting into practice were first articulated and developed in her speeches and dissents. Even when those ideas had no purchase with the rest of the Commission, she continued to ask whether there was a better way. Over time, her vision for the future became our roadmap. Moreover, I'm very happy to be able to say that we are actually putting those principles and ideas into practice for the benefit of investors, innovators, and the American economy. So, Hester, thank you. Thank you very much for your friendship, your service to this institution, and above all, for the example that you've set. You've demonstrated how much one determined, persistent voice can prevail even after years of opposition, indifference, and even active blocking. This Commission is better for your service, and the work that we carry forward will bear the imprint of your leadership for years to come. So God bless you as you move on to other endeavors. I wish you and I will. I will miss you and your always pleasant demeanor, but I'm happy that you will not be too far away. And please remember that as long as I'm around, for sure the door will always be open for you and especially for your comments and ideas. So now let me turn to the first two items on today's agenda. And unless you have anything to say right now, Mark.
Well, on Monday I had a conversation with Commissioner Peirce and told her I needed to prepare some remarks to give at the OCM marks her final day, and she, in no uncertain terms, said very clearly, the public wants to know about the substance of what we'll be discussing, not about her. So I told her I would not prepare any written remarks. I did not agree to not provide any impromptu remarks. Good job, but let me just tell a little bit of story of Hester. I think about her and how much care she puts into things. Now, I first met then Commissioner Paul Atkins out in San Francisco where the SEC was hosting the Small Business Forum and the meeting of the Advisory Committee on Smaller Public Companies, which was originally organized by Alan Beller. And I think that was 2005. And then at some point later on, you were looking for a court-fitting counsel. And I had worked previously with Chairman Cox when he was on the Hill and a number of his top staffers, and they all gave me a nice seal of approval. Commissioner Atkins said, well, I've met you. I mean, then he had another counsel in the office named Ken Gallagher, who saw my resume and apparently he said, looks great. And so Commissioner Atkins called me and said, would you like to come work for me? And then at the very end, maybe I should actually check with my other counsels. And yeah, sure enough, there was one person who said I need to do my diligence on this new person if I'm going to be sharing an office wall with this. Who is this? I need to talk with him, and that was the other, the third counsel, Hester Peirce. So I think it reflects the amount of, when we talk about fiduciary duties and the duty of care, how much care she puts into every decision she makes. And then when you start to work with Hester, you realize just how smart she is, but more importantly, how funny she is and how much she cares about everyone who she comes across. So it was really somebody who I looked up to my first two years here at the Commission, somebody who'd been here to show me the ropes, someone who'd worked in rulemaking. And I am in the Office of Regulatory Policy to better understand how we do things and how we properly do things when it comes to rulemaking at the Commission. And then since returning as a commissioner, having her as my colleague, particularly during the period June of 2022 when the Commission was still in its COVID protocols, we were at times it felt like some of the few people who were physically inside the building. And so this building can kind of get lonely with none of my colleagues here other than Commissioner Peirce. So there was a lot of bonding that went on, especially as we interacted with our then Chairman Gensler. All of her work I knew and her leadership that she's provided to the crypto task force. I said, this is what we need you to do once things changed on January 20th, 2025. And it's just been so impressive is how she's managed the process, how she's managed the interaction with stakeholders. It is a very high bar. You know, when Commissioner Atkins left office, I thought he's served a long time and Hester managed outdoing him by about 25%. So thank you for everything you've done. Thinking you've been at this agency and had a relationship for more than a quarter century going back to when you first started. I will truly miss you and I know all of us, I think who served in this world, commissioners know we're just here as one little bit of the commission's history, but you've left a very rich part of that as you leave. So thank you very much for your service to the public.
Well, thank you both very much for those overly kind remarks. And I think as you're about to hear, the work of the Commission is really a reflection of the work of the staff. You all are the ones who put in those late nights and work through the difficult issues. And so any commendations that I got from my colleagues should be right back at you. And Chairman Atkins, working for you as a counsel was a formative experience for me. I saw what it was like to work for a principled public servant. And I never wanted to be a commissioner because I never thought I could match what you did. And so you continue to be someone that I look up to tremendously. And it's been such a privilege to work with you now as chairman, and I leave feeling that the agency is in very good hands. And Commissioner Uyeda, you've been a delight to work with from that very first time when I was grilling you in that interview to when you came to the office and started doing your work. And then also whenever I had a question, I would come to you about my work, which is why you ended up going to the Division of Investment Management. Your knowledge of the securities laws and your under pressure have been remarkable for me to witness, and serving with you as acting chairman during a time of quite a lot of change was very comforting for me. I really appreciated your leadership. So again, I think this moment is about the staff and their work. And so let's turn it back to that. But I want to thank you all for your kind words.
Well, thank you very much. And there'll be other opportunities to properly fetch you before you depart. So turning back to business at hand and to the first two items on today's agenda, private markets are one of the great engines of American enterprise, equipping businesses with the capital to launch, to experiment, to scale, and in many cases to mature before assuming the obligations of a public company. Investor demand for private market investment opportunities is growing, and one of my priorities for the Commission is to explore ways to facilitate the ability of individual investors to participate in private markets while at the same time protecting those investors from bad actors and fraud. The Commission's efforts in this regard focused on expanding opportunities for investors' post-tax pre-retirement dollars complement efforts undertaken pursuant to President Trump's Executive Order on democratizing access to alternative assets for 401k investors. These goals are not incompatible with another priority of mine to make IPOs great again. As I've said repeatedly, exposure to the full dynamism of our markets should not be reserved for the wealthiest or for those who are deemed to be the most sophisticated. Private market investments, like any investments, are not without risks. But the mere presence of investment risk is not grounds to exclude individual investors in perpetuity. At its core, this is a question of freedom and fairness. Accordingly, our efforts are focused on what we have called responsible retailization, the notion of embracing investment, growth and innovation across all asset classes while protecting individual investors with appropriate safeguards. Today, we will consider two proposals from the Division of Investment Management that help to realize our responsible retailization vision. The first proposed rulemaking is designed to modernize the regulatory framework related to performance-based compensation. Performance-based compensation can offer a rational and effective means to define and align advisor and investor goals. Expanding the ability for advisors to charge performance-based fees could incentivize advisors currently operating in the private markets, as well as complex or differentiated public market strategies, to bring diverse strategies to a wider group of clients and investors, including investors in regulated funds. The second proposed rulemaking, meanwhile, is designed to modernize, enhance and simplify the interval fund framework, which may allow for the broader adoption of interval fund structure by fund managers seeking to offer retail investors exposure to private markets. Taken together, these proposals are important steps towards providing individual investors with more access to private market investment opportunities, including through the registered fund channel. I'm pleased to support this rulemaking package and excited, frankly, by the possibilities that it presents. And as always, I look forward to reviewing the public's feedback in the coming weeks. Before I turn it over, I should also like to thank the staff for their hard work in developing these proposals in the Division of Investment Management: Brian Daley, Sarah Ten Siethoff, Brian Johnson, Robert Holowka, Blair Burnett, Brad Goode, Pam Ellis, Daniel Levine, Neema Nassiri, Larry Pace, Susan Ali and Claudia Rios. In the Division of Economic and Risk Analysis: Dr. Joshua White, Lauren Moore, Alexander Schiller, James McLaughlin, Dasha Saffanova, Caroline Schulte, Joe Simmons and Aaliyah Ishmuhad Meduva. In the Office of General Counsel: Rusty Mcgranahan, Bryant Morris, Elise Brontel, Alice Wang, Amy Scully and Rebecca Orban. So now let me ask Brian Daley, the Director of Investment Management, and Dr. Joshua White, Director of the Division of Economic and Risk Analysis, for the staff's presentation on this rulemaking package. And following the staff's presentation, I'll ask Commissioner Peirce and Uyeda to offer their remarks.
Well, thank you, Chairman Atkins and Commissioners Peirce and Uyeda. Before we begin, we'd like to also acknowledge that Commissioner Peirce is departing from the Commission and this is her last open meeting as a Commissioner, hopefully not your last. We'll see. We have seen first hand, I've seen first hand her careful and thoughtful approach to the issues before the Commission and always with an eye towards investors and the integrity of the markets. So on behalf of the Division of Investment Management, I want to thank you for your dedicated service and we all wish you continued success in all that lies ahead. And please know that you will be missed.
Thank you, Brian. I appreciate that and I will miss you guys as well.
Today, the Division of Investment Management is pleased to recommend two rulemaking proposals designed to broaden investor choice while maintaining appropriate investor protections. The asset management industry has expanded significantly in recent decades, driven by evolving investor demands and the availability of a broader range of investment products and opportunities across both the public and the private markets. Asset managers today employ an increasingly wide array of investment strategies and offer those strategies through multiple investment products, including regulated funds, private funds, separately managed accounts, and direct advisory recommendations to individual clients. And as the variety of investment products and their delivery channels has grown, both institutional and individual investors have increasingly sought to access alternative investment assets, to pursue differentiated investment strategies, and to construct more diversified investment portfolios. The Division is committed to supporting the Commission as it identifies ways to broaden investor choice while appropriately addressing the risks involved with increasingly diverse portfolio compositions and operations. The first proposal we are recommending today would expand the ability of registered investment advisors and certain of their clients, such as regulated funds like closed-end funds, ETFs and mutual funds, to enter into performance-based compensation arrangements, specifically those based on a share of capital gains in or capital appreciation of an advisory client's account. Advisor compensation that is directly linked to benefits actually received by the client fosters alignment between clients and advisors. In addition, as these arrangements have evolved over time, they commonly include features that are designed and intended to mitigate the prospect of conflicts and excessive risk-taking. And this arrangement, as you know, is a defining characteristic of private funds, including hedge funds, private equity funds, venture capital funds. And as a result, today private fund AUM is about half the number of the total of U.S. equity market capitalization. Private market exposure is sought out and accessed by nearly every pension fund, every university endowment, every high-net-worth family office and every other category of institutional investor. But American retail investors have been unable to access the benefits of this arrangement and therefore have not had access to many of the world's most sought-after portfolio managers. So by providing the opportunity for retail investors to be able to have performance-based compensation arrangements, we hope to level the playing field by incentivizing private-side sponsors and advisors to offer their alternative strategies to regulated funds and retail investors. Now, in terms of specifics, the proposal would, number one, expand the ability of registered investment advisors and certain of their clients, including regulated funds, to receive performance-based compensation, subject of course to certain conditions and safeguards. And number two, allow investors that meet the accredited investor definition Reg D of the Securities Act to enter into performance-based compensation arrangements, which would expand the categories of clients that can enter into these arrangements. We anticipate that this expansion, by incentivizing investment advisors to broaden their client bases, could both result in greater opportunities for investors and regulated funds to access alternative investment strategies and an expansion of the menu of investment opportunities made available to accredited investors in certain private funds and separately managed accounts. But before moving on, I would like to note and stress that this proposal seeks to achieve its goals within the registered regulated fund model that has by and large served the American retail investor well for 86 years. Our capital markets are the envy of the world and the participation rates of ordinary Americans in those markets are both high and ever increasing. Traditional protections like independent board oversight, shareholder approval rights, leverage limits and mandatory disclosure and reporting requirements would remain and would serve as guardrails for this evolving portion of the industry. The second proposal we are recommending today would modernize the interval fund structure and permit regulated closed-end funds to issue multiple share classes. We believe there is tremendous utility in the interval fund structure, but that the prescriptiveness of the existing structure is restricting its use. Our proposal would modernize, enhance and simplify the interval fund structure again while maintaining appropriate investor protections. Specifically, this proposal would offer flexibility in both directions on the liquidity spectrum. For strategies where an underlying portfolio supports more frequent redemptions, we would offer that option for funds to provide monthly repurchases. Conversely, for structures where the portfolio echoes the traditional private equity or venture capital model, the proposed amendments would allow more time before the fund's first repurchase offer, better aligning the fund's liquidity terms with its underlying portfolio composition. Separately, today most investment companies are sold through individual and multiple distribution channels. That includes direct sales by funds and sales through intermediaries such as broker-dealers and investment advisors. As a result, we have multiple channels that require tailored fee and financial arrangements, which generally causes a fund to have to have multiple share classes to address these different economic structures. As a result, the multi-class structure has become common for regulated funds and is because it allows them to offer share classes with distribution servicing fee structures tailored to each one of these distribution channels. That provides benefits to both shareholders and fund sponsors, increases choice and allows tailoring of products. The Commission has long allowed regulated closed-end funds to issue multiple classes of shares, but through individual exemptive orders, this proposal would permit regulated closed-end funds to do so without the burdens and costs associated with the exemptive application process. So I'm joined to this table today by my colleagues from our Division's Rulemaking Office, the Head of that office, Sarah Ten Siethoff, the Assistant Director of our Investment Company Regulation Office, Brian Johnson, and the team lead on these projects, Blair Burnett. And I will now turn over to Neema Nassiri and Susan Ali from the Division of Investment Management who will describe these recommendations in more detail. Thank you all.
Thank you, Director. Today, we recommend that the Commission propose amendments to the qualified client definition and related provisions in Rule 205-3 under the Advisors Act that would expand the ability of registered investment advisors and certain of their clients, including regulated fund clients, to enter into performance-based compensation arrangements. The proposal includes several components. First, the proposal would amend the qualified client definition to expand the ability of investment advisors to regulated funds to enter into performance-based compensation arrangements provided that the following conditions are satisfied: the performance-based compensation does not exceed 20% of the regulated fund's net gains over a specified period; the regulated fund satisfies Rule 0-1a7 under the Investment Company Act, also known as the Fund Governance Standards; and the regulated fund's board, including a majority of its independent directors, determines that the performance-based compensation arrangement is in the best interest of the regulated fund and its shareholders, and also makes specific findings regarding the arrangement's appropriateness, structure and investor protection features. Second, the proposal would require a regulated fund to provide disclosure in the fee table and management discussion sections of the prospectus regarding any performance-based compensation paid to the registered investment advisor or its affiliates. Specifically, the proposal would add a distinct line item in the fee table about any performance-based compensation paid to the advisor or its affiliates, as well as disclosure about the variability of performance fees and providing a cross-reference to more comprehensive disclosure about the performance fees provided later in the prospectus. In addition, the proposal would require that the expense example in the prospectus reflect any performance fees. The proposal would also require that the management discussion include a detailed description of the performance fee arrangement, including a graphical representation illustrating the calculation of the performance fee across a range of hypothetical performance scenarios. The proposal also would amend Form N-CSR to require disclosure regarding the basis for a board's approval of the investment advisory contract. This disclosure would mirror the required board findings related to the board's determination that performance fees are in the best interest of the regulated fund. In addition to these amendments focused on regulated funds, the proposal would amend Rule 205-3 to modernize the qualified client definition by expanding eligibility to include investors that satisfy the accredited investor definition in Regulation D under the Securities Act and by relatively removing the qualified client definition's separate net worth test as well as its assets under management test. Lastly, the proposal would make conforming amendments to certain other rules under the Advisors Act whose provisions reference the qualified client definition and Rule 205-3. Thank you for considering our recommendation. I will now turn to Susan Ali who will discuss a recommended proposal for interval fund modernization and multi-class amendments.
Thank you, Neema. Today, we recommend that the Commission propose amendments to modernize Rule 23c-3 under the Investment Company Act, the Interval Fund Rule, as well as other amendments to permit regulated closed-end funds to issue multiple share classes without seeking an individual exemptive order. This proposal includes several components. First, the proposed amendments would extend the amount of time that an interval fund may defer its initial repurchase offer from two periodic intervals, or most typically six months, to two years. Regardless of the length of a fund's periodic interval, the proposed two-year deferral aims to allow newly organized interval funds adequate time to build a diversified investment portfolio and to provide funds with flexibility to invest in less liquid assets before periodic repurchase obligations attach. Second, the proposed amendments would permit interval funds to offer repurchases on a monthly basis. Individual exemptive orders currently permit some interval funds to do so. The proposed amendments would allow all interval funds to offer monthly repurchases without the need to obtain exemptive relief from the Commission. This amendment would provide interval funds with more repurchase offer flexibility and shareholders the potential for more frequent liquidity opportunities. Third, we are proposing to allow interval funds and other regulated closed-end funds that are not interval funds to offer discretionary repurchases once a year rather than once every two years as permitted under the current rule. This amendment would provide regulated closed-end funds with additional flexibility to offer repurchases and would provide interval funds more flexibility to offer repurchases outside of the periodic repurchase offers to accommodate, for example, event-driven liquidity events. Fourth, the proposal would amend the rule's liquidity provision by removing the requirement that a fund hold at least 100% of the repurchase offer amount in sufficiently liquid assets and replace it with a principles-based approach that would require an interval fund to manage its portfolio's liquidity so that the fund can satisfy repurchase requests without requiring a sale or disposition of the fund's investments at a price that deviates significantly from the value of those investments. The principles-based framework under the proposed amendments would provide interval funds with the flexibility to tailor their liquidity management strategies to their unique circumstances and investment strategies. Fifth, the amendments would permit interval funds to deduct deferred sales loads from repurchase proceeds. This change would put interval funds on the same footing as registered open-end funds and permit broader distribution financing approaches for interval funds. Additionally, we are proposing amendments to Form N-23c-3 and other parts of the interval fund rule to address outdated provisions and textual ambiguity. Finally, we are proposing to allow regulated closed-end funds to issue multiple share classes and to require certain related disclosures in funds' prospectuses. These amendments would build on existing Commission rules permitting open-end funds to offer multiple classes of shares, as well as the Commission's many exemptive orders extending this relief to closed-end funds. We further propose to require certain disclosures in shareholder reports to include information about fund expenses similar to that provided by registered open-end funds. Thank you for considering our recommendations. I will now turn to Josh White, Chief Economist and Director of the Division of Economic and Risk Analysis, who will discuss the economic impact of the recommendations.
Thank you. Good morning, Chairman Atkins, Commissioners Peirce and Uyeda. I first want to start by wishing Commissioner Peirce good luck in her future endeavors. And from all of us in the Division of Economic and Risk Analysis, it's been a pleasure to work with you. I think the intellectual curiosity and the rigor and the principled approach that you brought has certainly improved our work. And so we have enjoyed thoroughly working with you in this moment. I also want to say as an academic, I am quite envious of the students that will be in your classroom. I know they will have the privilege to learn from you and I know it's going to be a wonderful experience. So we wish you the best with that.
Well, thanks, Josh. You know what I'm getting myself into. But I will try to bring some economics to those law students or at least some economic thinking. I can't promise the math, but the economic thinking.
I love that. That makes me smile. Okay, so for the business today, the Commission is considering two proposals. The first proposal would expand the ability of registered investment advisors and certain of their clients to enter into performance-based compensation arrangements. This proposal may improve investor access to strategies typically associated with performance fees such as alternative and private market strategies. In addition, the proposal may improve the ability of advisors to design more incentive-compatible contracts. Overall, the proposal may help investors diversify their portfolios and improve their expected risk-adjusted returns. One possible cost of expanding the pool of investors that can access strategies with performance fees on capital gains is the potential for uninformed or insufficiently informed investing. However, the proposal contains safeguards that we anticipate would mitigate this risk. The second proposal would provide interval funds with greater flexibility over the timing of the repurchases and permit regulated closed-end funds to issue multiple classes of shares. The proposed amendments would allow interval funds additional time to ramp up operations and season their portfolios before making their first repurchase offer. The amendments would also allow these funds to meet investor demand for monthly repurchase offers without obtaining individualized exemptive relief. The proposed amendments would also permit closed-end funds to distribute shares via multiple channels without obtaining exemptive relief and would allow investors more investment options without requiring duplicative fund infrastructure. The proposal would also entail costs, including those associated with the proposed disclosures. In addition, investors that invest before an interval fund's first repurchase offer may face costs if they unexpectedly need liquidity before that offer occurs. In closing, I thank my colleagues in the Division of Investment Management and the Office of General Counsel, with whom we have worked closely during the development of the proposed amendments before the Commission today. Thank you, and we are happy to answer any questions.
Great. So let me turn it over to Commissioner Uyeda. I think it's Commissioner Peirce. Oh, Peirce. I'm sorry. Well, you're welcome to go first.
All right, writing me out of the script. Thank you, Mr. Chairman, and thank you to Brian and Neema and Susan and Josh. I appreciate your presentations. I'm happy to support today's two proposals to increase Main Street investors' opportunities to access private investments through professionally managed diversified funds. With the decline in the breadth of the public markets, retail investors' access to private markets is important for the sake of portfolio diversification and investor choice. These proposals would enhance retail investors' ability to decide for themselves how to meet their financial goals. The Commission historically has not looked kindly on retail investor exposure to private markets, even when it comes through professionally managed registered investment companies. Because most retail investors do not meet the definition of an accredited investor in Reg D, they cannot directly invest in privately offered securities by rule. Open-end funds, because they offer investors easy redeemability, generally cannot invest more than 15% of their net assets in illiquid investments. Unlike open-end fund shareholders, shareholders in closed-end funds and BDCs cannot redeem their shares anytime they wish. As a result, closed-end funds and BDCs are better aligned with investments in less liquid private securities. Nevertheless, until last year, according to a decades-old informal regulatory practice that sprouted within one of the SEC's many secret gardens, closed-end funds and BDCs either had to restrict themselves to accredited investors and have high investment minimums or limit private fund investments to 15% of their assets. Last year's change recognized that neither the Investment Company Act nor Commission rules required such limitations. Today's proposals build on this change by inviting professional investment managers operating under the protective constraints of fiduciary duty to serve retail investors seeking access to the private markets. The proposed amendments, which expand the ability of advisors to closed-end funds and BDCs to charge performance fees, could make these funds more attractive for investors and advisors by better aligning incentives. Performance fees are common in the private fund industry, where assets have more than tripled over the last decade. A second set of changes similarly could make interval funds, which offer periodic liquidity through share repurchases, a more attractive way for investors to access the private markets. Among other things, the proposed amendments would permit extended deferral of initial fund repurchase offers, allow for monthly repurchase offers and provide less prescriptive portfolio liquidity requirements. Lengthening the time before a fund must make its first repurchase offer, as you've heard, would enable an investor to ramp up the fund's investments as the advisor would not have to hold back capital to finance an early first repurchase offer. The proposed amendments also would provide interval funds with increased investment flexibility during the period between the repurchase notification and the repurchase pricing time. The proposal would replace current prescriptive rules under which funds may hold a greater portion of liquid assets than is necessary with a principles-based liquidity management provision. The public's input will help refine these proposals, but I hope that the spirit that inspired them will motivate future work by the Commission. The spirit seeks to foster innovation not for the sake of change, but for the sake of serving the investing public. Great innovations in the investment management space, including mutual funds and exchange-traded funds, have given countless Americans financial security. Our regulations can either encourage incumbents to sit on their laurels or challenge existing firms and new entrants to offer better products at lower prices to more investors so that they can live more financially secure lives. I want to thank the staff and the Divisions of Investment Management, Economic and Risk Analysis, and the Office of General Counsel for their work on these proposals and their commitment to maintaining a rule set that fosters the competition necessary to provide retail investors with an excellent selection of diversified investment funds. These funds may lack the flash of many of the financial products that dominate today's headlines, but they are the stuff of dreams of homes, education, and retirement. I do have two questions for the staff. First, will these proposals do anything to address the persistent gaps between net asset value and the prices at which closed-end funds trade? And if not, is there anything else the Commission could do to address this problem?
Thank you, Commissioner Peirce. I'm happy to answer that question. It's an important one. The rulemaking is not set out to address this issue of discounts and we do not anticipate that the proposal would have a direct impact on that issue. However, we are engaged with market participants on the persistent discounts in closed-end funds, listed closed-end funds and BDCs, and the staff will continue to be engaged with the market on this issue.
Okay, that's great to hear. Thank you. And then second, the release notes that we anticipate that the uptake of performance fees on capital gains in existing open-end funds would be limited. And this may be a question, I don't know if it's for you, Josh, but in what limited circumstances do we anticipate that open-end funds, even though they can provide only limited access to private markets, might use performance fees?
Thank you for that question, Commissioner Peirce. It's true the amended rule would be available to registered closed-end funds and open-end funds. One of the things that we discuss in the economic analysis is that we anticipate the uptake of performance fees on capital gains in existing open-end funds would be limited, and there's a few reasons for that. You know, in many registered open-end fund strategies may not be deemed to be appropriate by their fund boards for performance fees. So an example would be if a, you know, charging a performance fee on capital gains would be difficult to justify for a fund that tracks a market index. It would also be difficult to justify for a fund of funds to the extent that the underlying funds themselves also charge performance fees on capital gains. As a third example, it would be difficult to charge performance fees on capital gains for funds that focus on fixed income, and that's because the capital gains in that space tend to be income-based rather than capital gains-based. One of the things we also discussed is that many funds already compete on management fees. And so if you were to stack performance fees on capital gains on top of management fees for open-end funds, it may be difficult to attract capital and capital may flow out. So for those reasons, we did not anticipate that existing open-end funds would have as much of an effect.
Okay. So we're including them in case someone can come up with a use case, but we're not expecting a lot of them, sounds like.
I think that's correct. I think one of the things that is not on Josh's list is, you know, actively managed long-only funds, and that might be an area where these restrictions would not apply.
Okay, great. Thank you. I don't have any additional questions now, Mr. Uyeda.
Well, good morning and thank you to the staff for your presentation. Today, we are considering two rulemaking proposals regarding amendments to adviser performance-based compensation and interval fund modernization. Together, these proposals are part of an effort to allow more exposure to private investments as part of a retail investor's portfolio.
For the vast majority of Americans who work in the private sector, long-term retirement savings will be achieved through securities investments held in 401(k) accounts, individual retirement accounts or IRAs, and for the very youngest generation, Trump accounts. However, the investment portfolios underlying vehicles used by the average private sector worker are far different than the investment portfolios in pension plans for state and local employees.
If one were to look at the asset allocations of these government pension plans — so just CalPERS, CalSTRS, the New York State Common Retirement Fund — they have allocations to both public securities and private investments. Now, why would these large, sophisticated institutional investors have a slice of their portfolio in private investments?
Well, in the words of CalPERS' own investment staff to their board, they said, quote, 'Private equity is CalPERS' highest-returning asset class over the long term,' unquote, and that, quote, 'unlike public equity, private equity strategies provide CalPERS opportunity for substantial excess returns,' unquote.
Meanwhile, in the public equity space over the past quarter century, there has existed a growing challenge: the shrinking universe of public companies and the increasing concentration of returns among a handful of large-cap stocks. The number of publicly listed firms has declined significantly since its peak in the 1990s.
Further, achieving broad diversification among securities with uncorrelated returns has become even harder to achieve for ordinary Americans. For the holder of an S&P 500 index fund, the top ten companies constitute 40% of the index's total market capitalization, and the top nine positions are all in the same industry sector: technology.
Today's proposals are intended to provide additional paths for retail investors to obtain exposure to private investments. The first proposal would amend the qualified client definition and other provisions to expand the ability of investment advisers and their clients, including investors that meet the accredited investor definition in Regulation D under the Securities Act, to enter into performance-based compensation arrangements calculated based on capital gains or appreciation.
The second would enhance the flexibility for interval funds by extending the deferral of the first repurchase offer, permitting monthly repurchase intervals, enabling more frequent discretionary repurchases, providing for a principles-based liquidity framework, and simplifying other parts of the rule. The second proposal would also permit closing funds to issue multiple share classes under conditions similar to those available for open-end funds.
These proposals were fine-tuned to address how retail investors may access private market exposures under the discipline of the Investment Company Act and the Investment Advisers Act, board oversight, and additional disclosure. At the same time, progress should be measured against the central question for ordinary investors: does this framework provide access that is readily understood, fairly priced, and appropriately governed?
Some critics will argue that these proposals will not further investor choice and access, but rather serve as a gift to shady financial product sponsors and risks placing retirement savings into opaque, high-fee, and poorly performing products. We should address those concerns directly.
Under this framework, access is optional, not compelled. Investors engage through registered vehicles with mandated disclosures, governance by independent boards, and not to mention ongoing Commission oversight. Moreover, these investors are often under the guidance of a professional financial adviser who is subject to a best-interest obligation or a fiduciary duty. The aim is choice with accountability, not distribution at any cost.
These proposals do not change the exit dynamics in private markets, nor do they guarantee liquidity where it does not exist. Interval structures provide periodic liquidity. They are not a promise of frequent redemption. That design choice is transparent to investors, and boards will need to consider the alignment of repurchase policies with portfolio cash flows.
As with current closed-end funds and business development companies, there is no guarantee of liquidity, which may be limited or not offered at times. 401(k) plan fiduciaries are also subject to the Employee Retirement Income Security Act, or ERISA, and they remain responsible for any private investment products offered as plan investment options or risks thereof.
Fiduciaries must act in a manner that satisfies their duty of prudence under the laws and regulations set forth by the U.S. Department of Labor. The proposals, if adopted, will remove some of the regulatory frictions offering for the retail access to private investments. However, one significant remaining challenge to broad adoption of registered investment companies that offer exposure to private investments is valuation.
Illiquid assets are hard to price consistently, and valuation practices must withstand stress, strategy drift, and conflicts. Liquidity management can constrain valuation, especially when boards must reconcile repurchase offers with portfolio marks. Funds offering exposure to underlying illiquid investments may need to consider their use of independent price verification, documented methodologies, a lot of discipline, and board review that focuses on how valuation affects fees, performance reporting, and repurchases.
And there could be not insignificant additional cost associated with the process. But that's a decision for the public and market participants and their boards to decide, not government regulators, when there is the appropriate disclosure. So these proposals are steps in the right direction towards expanding exposure to asset classes to all Americans.
They expand avenues for exposure under a regulated framework, invite competition and innovation, and provide, most importantly, investor protection, valuation discipline, board governance, and conduct standards that protect investors, all subject to the Commission's oversight. For their efforts, I appreciate the work of the staff in the Division of Investment Management and Economic and Risk Analysis, as well as the Office of the General Counsel.
And I also greatly appreciate their continuing support for our efforts by Acting Secretary Keith Sonderling and Assistant Secretary Daniel Aronowitz and the staff at the U.S. Department of Labor. So thank you. I just have a couple of questions.
First, with respect to the two-year deferral for the first redemption, maybe if you can further elaborate on why you landed at two years, why not longer?
So I'm happy to take that, Commissioner. This was informed by input we received. You may remember a couple of years ago there was a concept release that we worked on together with our colleagues in the Division of Corporation Finance. And we asked in that concept release whether there were other modernizations in the Investment Company Act area that would merit consideration.
And one of the considerations that commenters laid out in that was a longer deferral period. Two years was a suggestion through that comment process, although of course we're requesting comment in the release on the appropriateness of that.
Great, thank you. Then I turn to one of my very favorite provisions of the securities laws, Item 3 at 491A, the fee table. You know, we are proposing, I think, some important provisions to accommodate performance fees. Does the staff intend to put out any mock-ups of what that fee might look like?
We've done that in the past in circumstances, and I've always had a long-standing concern as to how effective we are in communicating the fee table. I think over time fee tables, especially the footnotes that have come to the bottom, have grown more complicated, and I wonder if they are still fulfilling their primary goal, which is to provide information that's readily understandable to the average investor.
So is there any contemplation that we would provide some form of mock-up in addition to just the rule text of what a fee table might look like, as we've done in the past?
