SEC Expands Co-Investment Relief to Open-End Funds

On Monday, the SEC staff issued a no-action letter (the “No-Action Letter”), in which the staff stated that it would not recommend enforcement action if a registered open-end fund (“Open-End Fund”), whose primary investment adviser or sub-adviser is an Adviser under a Simplified Order, co-invests as if it were a Regulated Fund under its Adviser’s Simplified Order.¹

The No-Action Letter allows Open-End Funds to invest alongside affiliated funds and accounts in negotiated investments, including investments in private credit and private equity, subject to existing regulation concerning portfolio liquidity.²

Background

The 1940 Act prohibits an Open-End Fund, a registered closed-end fund (“Closed-End Fund”), or a BDC from participating in certain joint transactions with various affiliates.

For many years, the SEC has issued co-investment exemptive orders that permit Closed-End Funds and BDCs to participate in co-investment transactions with affiliated funds that could otherwise be prohibited under the 1940 Act. However, the SEC has generally declined to issue exemptive orders to Open-End Funds.

On April 29, 2025, the SEC issued an exemptive order that was the first in a line of “simplified” co-investment exemptive orders (“Simplified Order”).³ Since then, other Closed-End Funds and BDCs have rapidly applied for and have been granted co-investment orders based on this Simplified Order model. Simplified Orders have improved the co-investment process for Closed-End Funds and BDCs. Although Simplified Orders have been widely popular, the SEC initially declined to issue Simplified Orders to Open-End Funds.

SEC Expands Co-Investment Relief to Open-End Funds

The No-Action Letter paves the way for Open-End Funds to invest alongside affiliates in negotiated investments under Simplified Orders and represents a significant step forward for the industry. The No-Action Letter also alleviates the need for fund complexes that have already received a Simplified Order for Closed-End Funds and BDCs to amend such orders to include Open-End Funds.

The No-Action Letter is only available with respect to Simplified Orders for which the SEC published a public notice before May 4, 2026. Presumably, this is because the SEC intends to start issuing orders going forward that include Open-End Funds, obviating reliance on the No-Action Letter for future applicants. Accordingly, firms with pending applications or who are filing applications in the future should evaluate whether to include these revisions in their applications.

Co-Investment Approvals Delegated to a Committee of the Board

The Simplified Orders generally require that certain co-investment transactions be pre-approved by a Required Majority of the Regulated Fund’s board of directors. A “Required Majority” means both a majority of a fund’s directors who have no financial interest in such transaction, plan, or arrangement and a majority of such directors who are not “interested persons” of the fund.

In the No-Action Letter, the Staff provided relief to permit a board of directors of a Regulated Fund that is relying on a Simplified Order to satisfy the Required Majority approval requirements for transactions by delegating the board’s responsibilities to a committee of the board.⁴ The committee must consist of at least three disinterested directors who have no financial interest in the relevant transaction. The committee is also obligated to provide to the full board at each regular meeting a report on all co-investment transactions approvals made by the committee between regular board meetings.