SEC Adopts Amendments to Qualified Client Definition

Private Funds & Advisers

On February 15, 2012, the SEC adopted amendments to Rule 205-3 (the “Rule”) under the Investment Advisers Act of 1940, which governs the ability of an investment adviser to charge performance-based fees to “qualified clients.” The amendments codify the increases in the dollar thresholds individuals must meet to be considered a qualified client set by the SEC’s order in July 2011. Under the new Rule, a client is qualified and therefore can be charged a performance-based fee if:

  • The client has at least $1 million in assets under management with the adviser; or
  • The client has a net worth of $2 million, excluding the value of the client’s primary residence.
In addition, the Rule includes a grandfathering provision that aims to minimize the disruption to existing advisory contracts. As expected, if a client or investor met the definition of qualified client at the time the contract was signed, an adviser may continue to charge performance-based fees on both existing and subsequent investments.

Finally, as required by the Dodd-Frank Act, every five years the SEC will issue an order making inflation adjustments to the dollar thresholds for both individuals and companies.

The effective date of the Rule is May 22, 2012; however, the SEC confirmed advisers may rely on the grandfathering provisions now.








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