33-Act funds grow in 40-Act market

Asset managers chasing retail investors are moving aggressively into 33 Act funds this year as an alternative to mutual funds and ETFs.

The shift is part of an overall trend toward private-market investments, but also echoes the fears of fund directors who worried in 2023 and 2024 that excessive regulation of mutual funds and ETFs could push retail investors toward less-regulated types of funds.

New leadership at the SEC has reversed those policies, but has not eliminated those concerns – or slowed the launch of 33-Act funds that face fewer oversight requirements than 40-Act funds that invest 40% or more of their assets in securities.

Mutual funds, ETFs and closed-end funds could qualify, but advisers typically use 33-Act rules for products such as commodity pools, private credit and digital-asset funds focused on private assets rather than investment in public companies.

“These funds are still sold to the public, so they must meet the disclosure rules of the 33 Act, but they don’t trigger the board or compliance obligations of the 40 Act,” According to Aisha Hunt, managing partner at Kelley Hunt & Charles.

“If the fund doesn’t consist primarily of securities, for example, if it holds digital assets or commodities, it cannot be registered under the 40 Act and must instead register under the 33 Act,” Hunt said.

Interval and tender-offer funds launched under 33-Act rules have emerged as a sweet spot for firms seeking to bring private market strategies, once largely reserved for institutional or ultra-wealthy investors, downstream to broader client segments. Those funds offer a hybrid approach with periodic liquidity and lower transparency requirements, and easier access to alternative assets like private credit, real estate, or infrastructure.

SEI Investments, which launched its interval fund in 2024, is one of several large players now capitalizing on a surge of interest in semi-liquid products, especially affluent retail investors seeking to diversify into private markets, according to Erich Holland, SEI’s head of distribution

“It’s not just belief; it’s fact,” Holland said. “We’re seeing tens of billions of dollars flow into this space, and some of the world’s largest managers are launching semi-liquid products, particularly interval funds, to meet client demand.”

While 40-Act boards are not legally required to approve or oversee 33-Act products, trustees are often being briefed on those funds, particularly when the same adviser or sub-adviser manages both types of funds. “In some cases, board members may raise governance concerns if they see potential for conflicts of interest or resource diversion,” Hunt said. “However, formal approval authority usually does not extend to 33 Act-only vehicles.”

Additional challenges for fund boards

Oversight responsibilities grow more complex when boards span both structures, Hunt said.

Boards overseeing 33-Act as well as 40-Act funds face additional governance challenges involving liquidity management, valuation oversight, and distribution practices – particularly when 33-Act offerings are marketed alongside retail mutual funds or ETFs.

“There’s also a disclosure risk, as boards must ensure that fund materials are not misleading in light of differing regulatory frameworks,” she added.

For boards, the challenge is to balance the innovation opportunity with governance responsibilities, especially amid lingering concerns over regulatory complexity in

“Managers are realizing they can offer a private market experience without the operational and regulatory headaches of a 40 Act fund,” Hunt said. “That flexibility is hugely attractive, especially with so many regulatory proposals adding complexity on the mutual fund side.”

“With a mutual fund, you have quarterly board meetings, detailed board oversight, daily NAV calculations, and annual SEC filings,” said David Mahaffey, a partner at Sullivan Law. “CITs don’t have those. You still have a fiduciary duty and bank regulatory oversight, but the compliance costs are far lighter.”

Fund boards, however, are cautious about potential conflicts and are keenly aware of the trade-offs, according to Carolyn McPhillips, president of the Mutual Fund Directors Forum (MFDF)

“These structures can be incredibly useful for investors and advisors, but they also carry complexities that boards need to understand,” McPhillips said. “Liquidity management, valuation, disclosures; all those areas require careful oversight, especially as more retail-facing products come into play.”

Holland said SEI’s own board engaged in extensive due diligence before greenlighting its interval fund. But the firm’s strength as both an asset manager and a fund administrator gave it an advantage.

“These are capabilities we already provide to other managers, so we were able to solve for some of the governance and operational issues internally,” he said. “It was a point of a lot of discussion with the board, but ultimately we were confident we could deliver.”

Concerns about over-regulation persist

Underlying the shift is a broader industry frustration with the pace and intensity of regulation on mutual funds and ETFs.

Many managers and boards worry that these rules could create barriers to entry for investors or drive up costs, making mutual funds less competitive and pushing sophisticated investors toward less-regulated fund types.

“The cumulative effect of all this regulation is pushing innovation into areas like 33 Act funds,” Hunt said. “It’s a classic case of regulatory arbitrage but that doesn’t mean it’s a bad thing. It just means boards need to be vigilant.”

And while some of the most burdensome rule proposals, like swing pricing and certain liquidity mandates, were scrapped, board responsibilities haven’t eased. “The tone may feel quieter in 2025, but the boardroom work is no less active,” Hunt said.

“Rather than stepping back, boards are recalibrating,” she added. “I’m seeing greater emphasis on oversight delegation, board composition, and how fiduciary accountability is preserved as firms restructure or reprioritize internally,” Hunt said.

“We’re going to keep seeing more of these launches,” McPhillips said. “The important thing is that boards stay focused on their fiduciary duties, making sure these products truly serve investor interests, not just managerial convenience.”