SEC Proposes Widening Rule 205-3 Performance-Fee Exemption for Advisers
The SEC's September 30 proposal would amend Rule 205-3 under the Advisers Act, potentially widening which advisers and funds may charge performance-based compensation.
Per a law firm alert, on September 30, 2026 the SEC proposed amendments to Rule 205-3 of the Investment Advisers Act of 1940, the exemption permitting advisers to receive performance-based compensation despite the Advisers Act's general prohibition. The excerpt available here does not detail the qualifying conditions, covered entities, or transition mechanics, so the precise scope should be confirmed against the Federal Register text.
Why counsel should care: fee eligibility shapes fund economics. The Rule 205-3 qualifying fund condition is a gating item in private fund formation, side letters, and allocation waterfalls, and incentive fee terms are routinely negotiated with institutional allocators to multi-strategy, credit, and secondaries vehicles. A widened exemption could change which mandates may charge incentive fees and would touch fund documents, LPAC discussions, distribution agreements, and marketing restrictions.
Next steps: read the proposed rule text and economic analysis when published, note comment deadlines, and flag client vehicles whose fee terms could change if adopted as proposed. Expect comment, litigation risk, and a compliance phase-in; existing arrangements should not change on the proposal alone.