SEC Staff Continues March for Co-Investment: Still Stepping to Trump Administration Tune

Evolving Regulatory Approach to Fund Co-Investment

Beginning in April 2025, the SEC began issuing exemptive orders (Simplified Orders) that relaxed and simplified the conditions it previously had imposed on closed-end funds seeking to make investments in which certain parties related to the fund also invest, a practice commonly known as co-investment. Such orders have been necessary for closed-end funds registered as investment companies under the Investment Company Act of 1940, because certain provisions of that act otherwise could prohibit such co-investment.

In April 2026, the SEC staff took a further step, stating in a no-action letter that it would not recommend enforcement action if SEC-registered open-end funds also rely on Simplified Orders obtained by closed-end funds with which the open-end funds share an investment adviser or subadviser. Moreover, by its terms, this no-action relief applies to open-end funds even if certain determinations that such Simplified Orders require closed-end fund boards to make are instead made by committees of the open-end funds' boards, rather than by their full boards.

An important limitation, however, is that this no-action relief does not permit open-end funds to rely on any Simplified Order that the SEC published for notice on or after May 4, 2026. So, if no applicable Simplified Order was published by that date, a fund wishing to take advantage of the relaxed and simplified co-investment conditions will need to be covered by the terms of an order noticed after that date.

Some Pros and Cons of Fund Co-Investment Transactions

In many cases, investments in which closed-end or open-end funds co-invest with other parties related to the fund are available only in private transactions that are not registered with the SEC. Such investments, therefore, are generally not open to retail investors who do not qualify as "accredited investors" under the SEC's rules. Accordingly, investment by the funds in such private assets is a potential benefit to fund shareholders who would not otherwise be eligible to invest directly, especially to the extent that those fund investments are made at the direction of investment professionals legally responsible for making investment decisions with a view to the best interests of the fund and its shareholders.

Such co-investment may also benefit fund investors in other ways — for example, by increasing the range or amount of private assets to which a fund may have access, or by improving the terms on which a fund is able to participate in such investments.

On the other hand, exposure to any given private assets may not always be in fund shareholders' interest. Among other things, private assets are often subject to various risks and disadvantages that are less frequently at issue with publicly offered investments.

Moreover, fund co-investment in private assets may present potential downsides for fund shareholders as compared with other private investments a fund might make. For example, co-investment transactions may entail conflicts of interest that could cause a fund's management to put its own (or a related party's) interests ahead of the interests of fund shareholders.

Indeed, certain provisions of the 1940 Act are designed to protect investors in registered investment companies from some types of such conflicts. This includes the provisions from which closed- and open-end funds have obtained the exemptive orders and no-action relief discussed above. Although the conditions to which such relief is subject are designed to reduce the risks to which co-investment transactions may expose investors, they do not eliminate them.

Broader Policy Implications

The staff's exemptive and no-action positions discussed above are consistent with a broader policy of the SEC, and of the Trump administration more generally, to expand retail investors' access to the potential benefits of investments such as private equity, hedge, and private credit funds. For example, President Trump's Executive Order 14330, "Democratizing Access to Alternative Assets for 401(k) Investors," signed August 7, 2025, pushes for more such access by 401(k) plan participants via their interests in such plans. Similarly, the SEC's actions on fund co-investment increase retail investors’ access to private assets, but through regulated investment companies that are operated and overseen in a manner that can ease the attendant risks.

These SEC actions may also help start-up, private, and small businesses in which funds invest by making it easier for those businesses to raise capital, operate profitably, and compete with larger, more established rivals. These potential results also further important purposes of President Trump's Executive Order 14219, "Ensuring Lawful Governance and Implementing the President's 'Department of Government Efficiency' Deregulatory Initiative," signed February 19, 2025, which targets regulations that:

• Impose significant costs upon private parties that are not outweighed by public benefits; or
• Impose undue burdens on small business and impede private enterprise and entrepreneurship.

Finally, the evolution of the SEC's stance on fund co-investment also furthers purposes such as those described in President Trump's Executive Order 14267, "Reducing Anti-Competitive Regulatory Barriers," signed April 9, 2025, which targets regulations that:

• Create unnecessary barriers to entry for new market participants; or
• Limit, or have the effect of limiting, competition between competing entities.

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 can reduce the risk to retail investors.