SEC Staff Permits Mutual Fund and ETF Joint Transactions

Recent no-action relief permitting certain open-end funds to participate in co-investment transactions is the latest step forward in the significant trend of expanding access to alternative investment strategies for retail investors—or “retailization.”

On April 27, 2026, the US Securities and Exchange Commission (SEC) staff of the Division of Investment Management (the Staff) issued a no-action letter (the JPM Letter) to J.P. Morgan Investment Management, Inc. that effectively permits asset managers with exempt relief for closed-end fund joint transactions to now apply that relief to open-end funds.[1]

Specifically, the Staff stated that it would not recommend enforcement action under Sections 17(d) and 57(a)(4) of the Investment Company Act of 1940 (the 1940 Act) and Rule 17d-1 thereunder if certain registered open-end funds participate in co-investment transactions in reliance on an existing exemptive order, subject to compliance with that order’s terms and conditions (each, a “Co-Investment Order” and collectively, the “Co-Investment Orders”). The JPM Letter also permits fund boards to delegate co-investment approval requirements to a committee of at least three disinterested directors.

A registered fund is generally prohibited from transacting with affiliated persons on a joint basis, meaning where the fund and its affiliate are on “the same side of the table” opposite a counterparty in a deal, such as a co-investment. What makes this prohibition particularly burdensome is that it applies not only to a fund’s affiliated persons but also to affiliated persons of such persons, or so-called “second-tier affiliates.”

With two tiers of affiliation in scope, it is not hard to imagine a very broad and complicated universe of entities that could trigger the prohibition, particularly given all of the expansion by acquisition in the financial services industry in recent years. These prohibitions are found in Section 17(d) of the 1940 Act and Rule 17d-1 thereunder—with respect to open-end funds, such as mutual funds and exchange-traded funds (ETFs)—and in Section 57(a)(4) of the 1940 Act, with respect to business development companies (BDCs).

The SEC has historically granted co-investment relief to BDCs and closed-end funds, subject to detailed conditions designed to mitigate conflicts of interest. The applications for such relief were extremely long and detailed, and the process for obtaining relief would sometimes take many months and even years. However, over the course of the last decade, the SEC Staff began to engage with issuers on discussions of a more streamlined application for co-investment relief, which culminated in the first such order being granted to FS Credit Opportunities Corp. in 2025. [2] Quickly thereafter, several other closed-end fund and BDC managers obtained identical relief, and today there are dozens of asset managers with a streamlined Co-Investment Order in hand, including J.P. Morgan, who obtained an order on April 7, 2026.[3]

In a major development, the JPM Letter now only expands J.P. Morgan’s exemptive order to open-end funds, but it also effectively expands all of the prior “streamlined” orders in the marketplace.

CONDITIONS FOR RELIEF

The JPM Letter addresses (1) the ability of open-end funds to rely on certain existing Co-Investment Orders and (2) the manner in which such funds may satisfy the “Required Majority” approval conditions under such Co-Investment Orders.

Reliance on Certain Existing Co-Investment Orders

The Staff confirmed that it would not recommend enforcement action if an open-end fund relies on a Co-Investment Order as a “Regulated Fund,” provided that (1) the fund’s investment adviser or sub-adviser is subject to the applicable Co-Investment Order, (2) the fund complies with all of the terms and conditions of that Co-Investment Order, and (3) the factual representations underlying the Co-Investment Order remain accurate with respect to the fund. The Staff also stated that the applicable Co-Investment Order (1) must contain conditions that are substantially identical to those in the standardized framework derived from the FS Co-Investment Order and (2) must have been published for public notice by the SEC before May 4, 2026.

The Staff noted that, as put forth by J.P. Morgan in their request for no-action relief, open-end funds remain subject to Rule 22e-4 under the 1940 Act, which restricts open-end funds from investing more than 15% of their assets in illiquid investments, thereby limiting an open-end fund’s participation in co-investment transactions involving illiquid securities.

Satisfaction of the Required Majority Condition

Separately, the Staff provided no-action relief on the approval process for co-investment transactions, which typically requires approval by a Required Majority of disinterested directors, as that term is defined in Section 57(o) of the 1940 Act. Specifically, Conditions 2 and 6(b) of more recent Co-Investment Orders require approval by the Required Majority before a closed-end fund or BDC may (1) acquire a security in an issuer in which an affiliated fund already holds a position or (2) dispose of a security acquired through a co-investment transaction.

J.P. Morgan argued that this requirement is especially burdensome for registered funds (including closed-end funds and open-end funds) and BDCs with larger boards, as the lead time and logistics necessary to satisfy the Required Majority often conflict with the short timelines demanded by the types of transactions contemplated by the Co-Investment Orders.

The Staff stated that it would not recommend enforcement action if a Regulated Fund satisfies the Required Majority condition through approval by a committee of disinterested directors, in lieu of approval by the full board of disinterested directors. The Staff’s position is conditioned on the committee being composed of at least three directors who (1) have no financial interest in the relevant transaction and (2) are not “interested persons” of the Regulated Fund within the meaning of the 1940 Act. In addition, a majority of the members of such a committee must vote to approve each proposed co-investment transaction. The Staff also conditioned relief on the committee reporting its determinations to the full board at the next regular board meeting and indicated that required records under Section 57(f) of the 1940 Act must be maintained.

KEY TAKEAWAYS AND PRACTICAL CONSIDERATIONS

The Staff’s willingness to afford registered funds more opportunities to participate in private markets reflects the overall trend by the SEC in favor of the “responsible retailization” of private markets. This no-action relief, which the Investment Company Institute and other industry constituents have long argued should apply to open-end funds, represents a notable step in the ongoing evolution of the SEC’s approach to co-investment transactions. By enabling open-end funds to participate in transactions historically limited to closed-end vehicles and BDCs, the letter expands access to private and less liquid investment opportunities within all registered fund structures.

For example, open-end funds will now be able to invest alongside affiliated funds in private equity and venture capital funds, collateralized loan obligation structures, limited private offerings of operating companies, and other types of structured or securitized transactions—though, still within the guardrails of applicable diversification, concentration, liquidity, and fund-of-fund limitations. Looking from the other side of the table, issuers of such private funds, private companies, or other vehicles will now have expanded access to investment capital.

Fund sponsors should assess whether their existing Co-Investment Order can support expanded participation by affiliated open-end funds in light of the JPM Letter, including confirming whether such existing order imposes conditions substantially identical to the FS Co-Investment Order. Advisers filing new co-investment exemptive applications or amendments to existing applications on or after May 4, 2026, should explicitly include in the application any open-end funds that intend to rely on the Co-Investment Order.

Advisers to open-end funds should also review registration statement disclosure, liquidity risk management programs, valuation practices, allocation procedures, and exemptive order policies and procedures to identify and implement any necessary updates prior to relying on the JPM Letter.

Boards overseeing fund complexes that plan to rely on the JPM Letter might also want to discuss with fund management the attendant risks of such expanded relief and whether any procedural enhancements should be implemented. As a practical matter, the Required Majority clarification permitting committee-based approvals is also likely to be operationally meaningful, particularly for those funds with larger boards.

The no-action relief will allow boards to delegate and operate more efficiently while preserving the investor protection objectives underlying the Required Majority standard. A fund board that intends to rely on the committee-approval structure will need to establish and designate the necessary board committee, adopt a committee charter, and develop procedures for reporting to the full board.

For asset managers, this relief may facilitate broader product innovation and portfolio construction flexibility, particularly for strategies seeking exposure to private markets. At the same time, advisers must carefully evaluate compliance with the detailed conditions embedded in applicable Co-Investment Orders, including allocation procedures, board oversight, and conflict mitigation requirements. Asset managers should also assume that SEC’s Division of Examination will be focusing on compliance with Co-Investment Order conditions, particularly with respect to open-end funds that rely on the JPM Letter or that obtain a new exemptive order.