More CLOs in Retail Investors’ Diet: Will Their Financial Health Improve?

The investment company industry has welcomed a new Q&A that was published on March 5, 2026, as an addition to the SEC Division of Investment Management’s “Frequently Asked Questions.” The new Q&A increases the amount of collateralized loan obligations (CLOs) in which some investment companies can directly or indirectly invest, and to which investors in those investment companies — including ordinary retail investors — can therefore gain exposure.

The Problem

Many registered investment companies and business development companies serve as “acquiring funds” by investing in other investment companies (acquired funds). If acquiring funds’ investments in acquired funds are sizable enough, the funds must rely on exemptive relief from certain provisions of the Investment Company Act of 1940. The SEC’s Fund of Funds Rule, adopted in 2020, is one source of such relief, subject to certain conditions. One of the rule’s conditions requires that acquired funds not invest more than 10% of their assets in “private funds,” which are defined as funds that rely on the exemptions in sections 3(c)(1) or 3(c)(7) of the act that apply to certain nonpublic funds.

Many issuers of CLOs rely on these exemptive sections, which could require those CLOs to be counted as investments in private funds purposes of the 10% limit. This, in turn, would effectively limit the amount of exposure to CLOs that the acquired fund could provide, directly or indirectly, to any retail investors in the acquired or acquiring funds.

SEC Staff’s Solution

The division staff concluded that, given the nature of CLO debt securities, an acquired fund’s ownership of such securities would have little relevance to the underlying purposes of the Fund of Funds Rule. Accordingly, the staff’s new Q&A effectively resolves any ambiguity in this regard by stating that the staff will not recommend enforcement action to the SEC if acquired fund investments in CLO debt securities are not counted toward the 10% limit. CLO equity tranches, however, remain subject to the limit.

Implications for Retail Investors

Although increased exposure to CLO debt may produce favorable investment results in many cases, the staff’s no-action position also has the potential for investment pain. CLOs often entail considerable investment risks and usually are offered and sold in reliance on a nonpublic offering exemption from registration under the Securities Act of 1933. Accordingly, rather than being available to ordinary retail investors, CLOs can generally be purchased only by institutional and other categories of investors (e.g., “accredited investors”) that, for federal securities law purposes, are considered capable of fending for themselves when considering investment in risky securities.

The staff’s no-action position is consistent with a current overall policy of the SEC, and of the Trump administration more generally, to facilitate increased opportunities for retail investors to obtain access to the potential benefits of various types of investments such as private equity and private credit funds. For example, in 2025, the SEC staff withdrew its historic position that, if a closed-end investment company invested 15% or more of its assets in private funds, all of that investment company’s investors had to be accredited investors, each of whom the staff’s position also required to make a minimum initial investment of at least $25,000 in the investment company. The staff’s withdrawal of its position enabled shareholders of a closed-end investment company (many of whom could be ordinary retail investors) to have greater indirect investment exposure to private funds.

Nevertheless, the staff’s March 5 Q&A no-action position did not enable increased direct investment by retail investors in CLOs. Nor did the staff’s 2025 position on closed-end funds enable increased direct investment by retail investors in any private funds. Rather, in each case, any increased retail investor exposure to private assets would be accomplished only indirectly, i.e., via investment by the retail investor in intermediary funds that are subject to significant regulation by the SEC. The presence of such intermediary regulated funds can reduce the risks (in some cases substantially) of retail investors’ exposure to such funds’ private investments — a fact that doubtless influenced the SEC staff’s decisions to take these actions.

In the future, look for more actions by the SEC or its staff to facilitate increased retail investor participation in what have historically been private investment opportunities — especially where that participation is through a regulated intermediary or is based on investment advice or management provided by other firms or individuals whose qualifications and expertise may reduce the risk to retail investors.