SEC Proposes Modernizing Performance-Based Compensation and Custody Rules for Investment Advisers and Regulated Funds
The Securities and Exchange Commission issued two proposed rules on October 6, 2026: one to expand performance-based compensation for investment advisers serving regulated funds and accredited investors, and another to modernize custody rules for crypto assets and redesignate adviser custody requirements. Both proposals seek public comment by December 7, 2026.
Why it matters. These changes affect how investment advisers are compensated and how they and regulated funds custody assets, particularly crypto, influencing compliance, disclosure, and operational practices across the asset management industry.
The proposal would relatedly amend certain regulated fund registration and reporting forms to require separate disclosure of all performance-based compensation paid by regulated funds to their investment adviser. The proposed rule amendments would also allow investment advisers to receive this compensation from additional clients by revising the rule's “qualified client” definition to include inv…
As part of this commitment, the Commission is proposing amendments to the “qualified client” definition and other provisions in rule 205-3 under the Advisers Act that would expand the ability of registered investment advisers and certain of their clients, including regulated funds under certain conditions and investors that meet the “accredited investor” definition in Regulation D under the Secur…
The Securities and Exchange Commission (the “Commission” or the “SEC”) is proposing new custody rules under the Investment Company Act of 1940 (the “Investment Company Act”) and amendments to related reporting and recordkeeping requirements to address how regulated investment companies may custody crypto securities and similar investments, and amendments to the custody rule and related reporting…
The proposed custody rules and related recordkeeping and disclosure amendments consider the unique aspects of crypto assets and are designed to maintain fair, orderly, and efficient crypto asset markets, facilitate investment in crypto assets, and protect crypto asset investors. In addition, we are also proposing several amendments to the Advisers Act and Investment Company Act custody rules to m…
the registered investment company industry grew dramatically from under $450 million in assets and 300,000 investors in 1940 to over $45 billion in assets and 4 million investors by the end of 1966
registered investment advisers and certain of their clients, including regulated funds under certain conditions and investors that meet the “accredited investor” definition in Regulation D under the Securities Act, to enter into performance-based compensation arrangements calculated on the basis of a share of capital gains in or capital appreciation of an advisory client's account
Congress also amended the Advisers Act to include new section 206A, which authorized the Commission, by rulemaking on its own motion or by order upon application, to exempt conditionally or unconditionally any person or transaction (or class or classes of persons or transactions) from any provision in the Advisers Act, if and to the extent such exemption is necessary or appropriate in the public…
The Securities and Exchange Commission (the “Commission”) is proposing to amend the rule under the Investment Advisers Act of 1940 that provides an exemption from the statutory prohibition on registered investment advisers receiving compensation on the basis of a share of capital gains in or capital appreciation of an advisory client's account.
Congress also amended the Advisers Act in 1996 to authorize the Commission to exempt any person or transaction (or class thereof) specifically from the performance fee prohibition in section 205, provided that the exemption relates to an advisory contract with “any person that the Commission determines does not need the protections” of the prohibition
the proposal would amend certain forms under the Investment Company Act to require disclosure of all performance-based compensation to shareholders of regulated funds
section 205(a)(1) functions to broadly prohibit a registered investment adviser from entering into, extending, renewing, or in any way performing an investment advisory contract that provides for any performance fees to the adviser
Congress should act to “protect fund clients” in the growing investment company industry and “insulate investment company shareholders from arrangements that give investment managers a direct pecuniary interest in pursuing high risk investment policies.”
an advisory fee calculated as a percentage of the total value of a client's account (
e.g.,
two percent of such client's assets) is not a performance fee.
Section 205(a)(1) of the Advisers Act generally prohibits an investment adviser registered or required to be registered with the Commission from receiving compensation on the basis of a share of capital gains in or capital appreciation of an advisory client's account.
an advisory fee calculated as a percentage of the investment gains in a client's account over a period of time (
e.g.,
twenty percent of an account's gains over the last year) is a performance fee
Congress amended the Advisers Act in 1970 to authorize the Commission to exempt any person or transaction (or class of persons or transactions) from any provision of the Advisers Act, if and to the extent such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and the provisions of the Adviser…
the staff of our Division of Trading and Markets (“TM”) and the Financial Industry Regulatory Authority (“FINRA”) issued a joint statement that reminded broker-dealers of their responsibilities under the securities laws, including under rule 15c3-3 (the “customer protection rule”) under the Securities Exchange Act of 1934 (the “Exchange Act”), when maintaining custody of digital asset securities
the crypto asset markets have grown significantly to reach a global market capitalization of approximately $2.7 trillion in May 2026, up from $800 billion at the beginning of 2021.
