SEC Performance Fee Proposal 2026: BDC and Interval Fund Holders

What is already on our site, and what this page adds

Our qualified client page covers the dollar tests of rule 205-3 since 1985 and gives the proposal one paragraph. Our guide to the SEC's September 2026 interval fund proposal covers the redemption rules and points here for the fee release. This page reads the fee release itself, 70 pages of the Federal Register, for one reader: someone who owns, or is thinking of buying, a BDC or an interval fund and wants to know what the proposal does to the fee.

Today and under the proposal

Under Advisers Act section 205(a)(1) a registered adviser may not take a share of capital gains or appreciation unless an exception applies. For a fund sold to the public, the SEC describes four doors today. The fifth is new.

Source: 15 U.S.C. 80b-5(b)(2), (b)(3); Federal Register 2026-20474, 91 FR 63676, pages 63684, 63686 to 63688, 63704 and 63716. The “fits” and “status” columns are our summary.

The SEC explains why the look-through door does not work for a fund with retail holders: performance fees are paid at the fund level, so a fund must “restrict their entire investor base to qualified clients”. The Investment Company Act also does not let a fund charge different advisory fees to different shareholders, so the fee falls on everyone through NAV.

What the three conditions say

The proposed text of rule 205-3(c)(1)(iv) has three conditions, all of which must hold:

• A cap. Compensation on a share of capital gains or appreciation may not exceed “20% of the regulated fund's net capital gains or net capital appreciation over a specified period or as of definite dates”. The rule sets a ceiling, not a rate. It sets no minimum measurement period.
• Governance. The board must satisfy rule 0-1(a)(7) of the Investment Company Act. The SEC lists the standards: a majority of independent directors, independent directors who pick other independent directors, independent legal counsel, an annual board self-evaluation, independent directors meeting at least once each quarter without the adviser's people, and authority to hire their own staff and experts. The SEC counts at least 8,336 registered funds that already meet them.
• A board determination, every year. As part of the annual section 15(c) review of the advisory contract, the board, with a majority of non-interested directors, must find the arrangement in the best interests of the fund and its shareholders, in writing, on three points: how appropriate it is given the fund's strategy and valuation practices; the basis of calculation, including the measurement period and whether it is based on realized gains, unrealized gains or both; and how adequate the investor protection features are, “including, where no such investor protection features are present, the basis for concluding that the compensation arrangement is adequate”. A hurdle, high-water mark or loss carryforward is listed as an example. None is required.

Two readings of our own, flagged as such. First, the proposed conditions do not repeat the statute's bar on outstanding options and warrants or a profit-sharing plan (our reading of the proposed text), so a BDC using the new route would face the board test instead. Second, the proposed text caps the gains-based compensation only; it does not say how that sits next to an income fee in the same fund, and the release does not address it that we found.

How many of these funds already pay a performance fee

The SEC counted, using Morningstar Direct (June 10, 2026), BDC filing data (December 31, 2025) and the “IncentiveFeesPercent” tag in Form N-2 filings through August 25, 2026. The counts mix fees on income and on gains; the SEC does not split them.

Source: Federal Register 2026-20474, 91 FR 63715 and 63716; shares are our arithmetic. The 41 of 139 interval funds is stated by the SEC as 29.5%.

Two details matter to a holder. The academic study the SEC cites finds “nearly all BDCs specializing in private credit charge a 20 percent performance fee on cumulative net investment income above a defined hurdle rate”, and a mean and median BDC incentive fee of 19.33% and 20% across 53 listed BDCs from 2001 to 2023. And among the 176 BDCs the SEC counts 102 private BDCs (about 42.9% of BDC net assets) that voluntarily limit their holders to accredited investors; private BDCs do not file Form N-2, the form that would carry the new fee table line.

For the funds themselves, our guides to the non-traded BDC list, what a BDC is, what an interval fund is and the list of interval funds show which funds exist. The SEC census above does not name any.

What it would change for a BDC holder, a fund at a time

Source: Federal Register 2026-20474, 91 FR 63693, 63716 and the questions in section II.A; the “what changes” columns are our summary.

What the SEC says can go wrong

The release is unusually direct about the risks of its own proposal. These are the points a holder can use:

• Fees on marks that later fall. On unrealized appreciation, “shareholders may bear asymmetric performance fees on unrealized appreciation that is subsequently reversed, eroding net asset value without any mechanism for recovery absent contractual protections.”
• Valuing private assets. When a fund holds assets with no readily available market quotation, upward moves in fair value “could inflate a performance fee base without corresponding economic realization”.
• NAV squeezing. Buying private fund interests at a discount and immediately marking them to NAV “can artificially accelerate reported returns and, by extension, performance fee accrual”. The SEC says the practice is “sometimes referred to as” NAV squeezing.
• Listed funds at a discount. A shareholder “who purchased shares at a discount to net asset value and continues to hold at a discount has not realized, and may never realize, the net asset value appreciation on which the performance fee is based.”
• Index funds. A performance fee in a fund tracking a broad market index “would generally seem unjustifiable”.

For BDCs specifically, the SEC does not expect much: “we do not expect this part of the proposal to have a significant effect on access to alternative strategies in the regulated fund space”, because BDC advisers can already charge on income and realized gains.

A $250,000 holding in numbers (our arithmetic)

These examples use made-up returns to show how a ceiling of 20% of net gains works. They are not forecasts and not any real fund. A 20% cap is a ceiling; the contract sets the rate.

Arithmetic: 8% of $250,000 is $20,000, 20% of that is $4,000; 5% is $12,500, so the excess is $7,500 and 20% is $1,500; 6% is $15,000 and 20% is $3,000. The SEC describes a hard hurdle as one where the fee is calculated “only on returns in excess of the threshold” and a soft hurdle as one that permits “a performance fee on all profits once the threshold is cleared”. It also notes that the fee table example assumes a 5% annual return, so a fee payable only above a higher hurdle would show nothing in the example.

Who could hold such a fund under the accredited route is a different question. The SEC estimates, from the 2022 Survey of Consumer Finances, 24.3 million US households (18.5%) are accredited investors, 16.4 million (12.5%) meet the $1 million net worth test, and 7.2 million of the accredited already pass the $2,700,000 net worth test. That leaves 17.1 million accredited households who are not qualified clients today and would be under the proposal. A household whose net worth excluding the home is around $250,000 is below every wealth line here. It is accredited only through income over $200,000 ($300,000 joint) or another route, such as a license. For that household the board route is the one that matters, since it does not look at the investor at all.

What the new disclosure would show

All regulated funds that pay performance fees would have to follow the disclosure rules, including funds that pay only an income fee and BDCs using the statute. The proposal:

• adds a “performance fees” caption directly below management fees in the prospectus fee table, with the fee paid in the prior fiscal year as a percentage of net assets attributable to common shares (Form N-2) or of the value of the investment (Form N-1A);
• redefines “management fees” to exclude any fee based on performance, so the base fee and the performance fee show on separate lines;
• lets a new fund show zero performance fees until it has a year of results;
• requires a description of the rate, whether realized or unrealized gains or income are used, the measurement period, hurdles and high-water marks, and “a graphical representation that illustrates the calculation of the performance fee across a range of hypothetical performance scenarios”.

A fund would have 12 months from adoption to comply with the form changes, but one that relies on the new rule route must comply with the forms the day it first relies on it.

Where the SEC is asking for comment

The release poses numbered questions. Four bear on a holder of these funds:

• Question 3: whether there is a basis to exclude BDC advisers from the amended rule.
• Question 7: whether the 20% cap should be lower, for example 10% or 15%.
• Question 8: whether fees on unrealized gains should be allowed at all, or realized gains only.
• Question 20: whether the rule should require a fund's portfolio to consist only of assets classified as level 1 or level 2 under the FASB fair value hierarchy, which would likely exclude most funds that hold private assets (our reading).

Comments on File No. S7-2026-28 are due December 7, 2026, through the SEC's online comment form, by email to rule-comments@sec.gov with the file number in the subject line, or by post to the SEC Secretary.

Verdict: where this leaves a holder

• You hold a BDC that charges only an income incentive fee: nothing in the cap changes your fee. What you would see is the new performance fee line and graph if the fund files Form N-2. A later move to add a fee on unrealized gains would have to go through the board, and registered funds already disclose the basis for the board's approval of the advisory fee in Form N-CSR.
• You hold an interval fund or tender-offer fund with no performance fee: the proposal makes it possible for the adviser to ask the board for one, up to 20% of net gains. The board would have to find it in your interest, in writing, each year.
• You are choosing a fund after any final rule: compare the performance fee line, the hurdle, the high-water mark and whether the fee is on realized or unrealized gains, not just the base fee.
• You are neither: nothing changes until the SEC adopts a final rule. This is a proposal; the rule can change after the comments.

What a reader can do with this

• Read the fee table, not the headline rate. Find “management fees” and, in funds that have one, the incentive fee in the prospectus (Form N-2) or, for a BDC, in the latest 10-K or 10-Q. Under the proposal the performance fee line would be separate.
• Check what the fee is calculated on. Income, realized gains and unrealized gains are three different bases. The 20% cap speaks only to gains and appreciation.
• Look for the protections. Ask whether there is a hurdle, a high-water mark or a loss carryforward, and whether fees are held back if marks reverse. The SEC says none is required.
• Know your own category. If you are not accredited, the accredited route is not for you, but the board route would still reach you. Our guides on qualified purchaser vs accredited investor and the qualified client definition give the tests.
• Mark December 7, 2026. That is the last day to file a comment on S7-2026-28.

FAQ

Sources, read and saved on November 3, 2026: SEC, Investment Adviser Performance-Based Compensation Modernization, Release Nos. 33-11443, 34-106533, IA-7022, IC-36350, File No. S7-2026-28, Federal Register 2026-20474, 91 FR 63676 (October 6, 2026), federalregister.gov full text; 15 U.S.C. 80b-5 (Advisers Act section 205). Percentages marked “our arithmetic” and the dollar examples are ours; the household, fund and fee counts are the SEC's estimates as stated in the release. This is analysis of public documents, not investment, legal or tax advice.