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Increasing the Threshold for Qualified Clients and Performance Fees

Posted on May 25, 2016 by Doug Cornelius
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The U.S. Securities and Exchange Commission proposed to increase the net worth threshold for “Qualified Clients” from $2 million to $2.1 million.

money
Rule 205-3 currently requires “qualified clients” to have at least $1 million of assets under management with the adviser or a net worth of at least $2 million.

Under the Investment Advisers Act, an adviser can only charge a performance fee if the client is a “qualified client”. The SEC equates net worth with sophistication, so a “qualified client” had to have a level assets to prove their financial sophistication.

The Dodd-Frank Wall Street Reform and Consumer Protection Act required a change for Section 205(e) of the Advisers Act by adjusting the levels for inflation and to re-adjust the levels every five years. The SEC also tossed out the value of a person’s primary residence, just as they did with the accredited investor standards.

The last inflation adjusted increase was in 2011, so it’s time to adjust again.

Inflation has been low, so the increase is small. So small that the inflation increase for the $1 million assets under management prong is below the rounding amount specified in Rule 205-3.

So it’s time to revise you client intake / investor subscription documents.

Sources:

  • Performance-Based Investment Advisory Fees Release IA-4388
  • SEC Proposes Higher Net Worth Threshold for Qualified Clients under the Advisers Act By Anthony Drenzek, Stephen T. Mears and Christopher Wells in The Capital Commitment
  • Tighter Rules on Advisory Performance Fee Charges

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