SEC Increases Qualified Client Thresholds Under Rule 205-3
On April 28, 2026, the Securities and Exchange Commission (SEC) issued an order adjusting for inflation the financial thresholds used to determine whether an investor qualifies as a “qualified client” under Rule 205-3 of the Investment Advisers Act of 1940.
07.01.26
The updated thresholds became effective on June 29, 2026. The adjustment was required under the Dodd-Frank Act, which mandates that the SEC review and adjust the thresholds for inflation every five years.
New Qualified Client Thresholds
Effective June 29, 2026, an investor may qualify as a qualified client by satisfying either of the following tests:
- Assets Under Management Test: The investor must have at least $1.4 million under the management of the investment adviser immediately after entering into the advisory contract (increased from $1.1 million).
- Net Worth Test: The investment adviser must reasonably believe, immediately prior to entering into the contract, that the investor has a net worth exceeding $2.7 million (increased from $2.2 million).
Applicability
The updated thresholds apply to advisory contracts and private fund subscriptions entered into on or after June 29, 2026. Existing contractual relationships generally are not subject to the new thresholds and are effectively grandfathered under Rule 205-3’s transition provisions. However, if a new investor is admitted to a private fund after June 29, 2026, that investor must satisfy the qualified client requirements in effect at the time of admission, even if the fund was formed before June 29, 2026.
Action Items
Investment advisers and private fund sponsors should review subscription agreements, investor questionnaires, side letters and advisory agreements for references to the qualified client thresholds. Any qualified client representations reflecting the prior $2.2 million net worth threshold should be updated to the new $2.7 million threshold, and any references to the prior $1.1 million assets-under-management threshold should be updated to $1.4 million. In addition, compliance and investor onboarding procedures should be revised to ensure that all investors admitted on or after June 29, 2026 are evaluated using the updated qualified client standards.
Effect on Existing Fund Documents
Many private fund subscription packages include investor representations relating to qualified client status. Any forms used for subscriptions accepted on or after June 29, 2026, should be reviewed to confirm that they reference the updated financial thresholds. Funds relying on qualified client representations should also ensure that administrators and investor onboarding teams are using current versions of subscription documents.
If you have any questions, please contact the authors. Co-authors Keith Kaplan (kkaplan@klehr.com / 215.569.4143) and Nicole S. Haiem (nhaiem@klehr.com / 215.569.1496) ,partners, and co-author Madison J. Mueller (mmueller@klehr.com / 215.400.2850), associate, are members of the Corporate & Securities Department.