New SEC rules would fleece everyday investors to enrich Wall Street

By Robert Pozen, Emily Gee

The agency should ensure funds' risks are clear

The U.S. Securities and Exchange Commission, led by Chairman Paul Atkins, has released proposed rules that would expose retail investors to higher fees and riskier assets.

New proposals from the Securities and Exchange Commission will tilt the scales in favor of Wall Street and against a huge group of retail investors.

At the end of 2025, approximately 130 million Americans held assets of $45 billion in mutual funds. The SEC recently released a raft of proposed rules that would expose everyday retail investors to higher fees and riskier assets by allowing one-sided performance fees and making it easier to sell retail funds holding illiquid private securities.

Mutual funds have historically charged much lower fees than private funds reserved for sophisticated investors. Under the Investment Advisers Act, mutual funds may pay an annual management fee plus balanced "fulcrum" fees. These penalize an adviser for poor performance to the same extent they reward good performance. For example, if a performance-fee structure increased fees by 20 basis points in a year when the manager outperformed the S&P 500 Index SPX by 10%, it would have to decrease fees by 20 basis points in a year when the manager underperformed that same index by 10%.

The SEC now proposes allowing mutual-fund managers to adopt the fee structures common in private funds: charging higher fees for good performance while suffering no penalties for bad performance. Furthermore, these fees could be calculated based on unrealized, "paper" gains. This is a major departure from the historic standard of net realized gains - thus, permitting managers to pocket performance fees on temporary highs that may vanish the next year.

Under this policy, mutual funds could newly adopt the fee structures typical of private funds, a 1% or 2% management fee and a performance fee of up to 20%. Imagine an investor whose mutual fund gains in paper value in one year but suffers actual losses in year two. The investor would pay $2,000 in performance fees for the first year's unrealized gains of $10,000, with no fee reduction in year two even if those unrealized gains turned into actual losses of $10,000. The SEC is essentially asking mutual-fund investors to accept a rigged proposition: "Heads I win, tails you lose."

The result for investors would be lower returns and higher volatility. Because advisers profit from gains but bear no downside risk, they would be incentivized to chase high returns and push investors into riskier investments. Over time, this fee structure would eat into the returns of retail investors, diminishing the hard-earned savings that middle-class Americans rely on for mortgages, tuition and retirement.

The SEC proposal would make it easier for private equity and private credit funds to sell shares to retail investors. These individuals often lack the financial expertise to evaluate the assets held by these funds, or the means to absorb significant losses from these risky investments. Current SEC rules protect everyday savers by limiting private market investments to accredited investors who meet specific financial thresholds: an annual income of $200,000 ($300,000 for couples) or net worth of $1 million, excluding a primary residence.

Because these thresholds were established in the 1980s and never adjusted, they're already insufficient. To reflect inflation since 1982, the net-worth requirement should be $3.5 million today, and the income threshold should be $693,000 for individuals and over $1 million for couples. Yet the SEC is moving in the opposite direction. It is maintaining these outdated financial thresholds while broadening the definition of an accredited investor to include anyone holding specific finance-related credentials, like a CPA or a CFA, regardless of their financial resources.

Already, business development corporations with private credit holdings are fueling a redemptions crisis among retail investors, who likely didn't understand the complex risks associated with the securities of private companies. The SEC's new proposal would make it even easier for Wall Street to market funds designed to hold illiquid private equity or debt.

Historically, private equity and private debt funds imposed lock-ups that prevented accredited investors from accessing their funds for long periods of time. To market these assets to retail investors, managers developed "semi-liquid" vehicles like interval funds and business development companies. These vehicles allow investors to redeem shares quarterly - but usually only up to 5% of a fund's assets.

The new SEC proposals would allow sponsors to operate these vehicles more flexibly. They could offer to repurchase shares from shareholders monthly rather than quarterly. They could be marketed via multiple distribution arrangements including sales loads and monthly marketing fees. Most importantly, the proposal extends the buffer period before a fund must make its initial repurchase offer. This gives managers more time to build portfolios of private companies before ever having to honor a withdrawal request.

The SEC is moving in the wrong direction by allowing mutual funds to charge one-sided performance fees and encouraging Wall Street to sell more private assets to unsophisticated buyers. Instead, the SEC should bolster investor protections by increasing the criteria for accredited investors to reflect inflation, and by ensuring all retail investors fully understand the risks in buying funds holding illiquid securities of private companies.

Robert Pozen is a Distinguished Senior Lecturer at MIT Sloan School of Management and a former president of Fidelity Investments.

Emily Gee is the Senior Vice President for Economic Policy at the Center for American Progress.

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10-13-26 1354ET