Investment advisors registered with the Securities and Exchange Commission may charge performance fees only to clients who meet the definition of “qualified client” under SEC Rule 205-3.
In Release No. 1A-3198, the SEC announced that it intends to issue an order increasing the dollar thresholds contained in the definition of “qualified client.” Currently, a client meets that definition if the client has assets under management with the advisor of at least $750,000 or a net worth in excess of $1.5 million at the time the investment advisory contract is entered into. The SEC intends to raise those thresholds to $1 million and $2 million, respectively.
In addition, the value of the client’s primary residence (as well as any indebtedness secured by the residence not exceeding such value) would be excluded from the net worth calculation. This is consistent with the recent changes to the “accredited investor” definition for private offerings conducted pursuant to Regulation D.
The SEC also intends to adjust those thresholds every five years for inflation, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Accounts of investors who do not meet the new standard, but who subscribed for fund interests while the advisor was exempt from SEC registration, will be “grandfathered.”
The SEC is requesting comments to the proposal. If adopted, many advisors will have to update their advisory contracts and subscription agreements accordingly.