There are so many buckets for classifying clients and investors under the SEC regulatory standards. Lots of focus and discussion has been targeted at the “accredited investor” standard for private placements. The “Qualified Client” standard under the Investment Advisers Act seems to attract very little attention.
Rule 205-3 under the Advisers Act exempts an investment adviser from the prohibition against charging a client performance fees when the client is a “qualified client.” The rule allows an adviser to charge performance fees for clients with a lot of money.
There are two ways to qualify as a “Qualified Client”:
(1) “a natural person who, or a company that, immediately after entering into the contract has at least $1,000,000 under the management of the investment adviser” or
(2) “a natural person who, or a company that, the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract … has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $2,000,000.
The Dodd-Frank Wall Street Reform and Consumer Protection Act amended section 205(e) of the Advisers Act to provide that every five years, the SEC has to adjust for the effects of inflation the dollar amount thresholds for a Qualified Client, rounded to the nearest multiple of $100,000. That five year mark has come around and the standards are increasing as of August 16, 2021.
Registered investment advisers entering into performance-based compensation arrangements with clients on or after Aug. 16, 2021 will have to make sure the client has assets under management of at least $1.1 million or have a net worth of at least $2.2 million.
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