SEC Provides Notice of Intent to Adjust the Dollar Amount Threshold Tests Under the Definition of “Qualified Client” Under Rule 205-3 of the Investment Advisers Act of 1940
06.01.21
The SEC recently announced that it intends to issue an order that would adjust for inflation the dollar amount threshold tests under the definition of “qualified client” under Rule 205-3 of the Investment Advisers Act of 1940 (the Advisors Act). Section 205(a)(1) of the Advisers Act generally prohibits a registered investment adviser from providing investment advisory services to a client in exchange for compensation that is based on a share of capital gains on, or capital appreciation of, the funds of a client.
Rule 205-3 provides for an exemption from this general prohibition that allows registered investment advisers to charge performance-based fees to “qualified clients” that meet certain dollar amount threshold tests for net worth or assets under management of the registered investment adviser.
Consistent with the requirement under Rule 205-3 that the dollar amount threshold tests be adjusted for inflation approximately every five years, the SEC has announced that it intends to issue an order that would increase (1) the minimum net worth of a “qualified client” from $2,100,000 to $2,200,000 and (2) the minimum dollar amount of assets under management from $1,000,000 to $1,100,000.
An order adjusting the dollar amount threshold tests will be issued unless the SEC orders a hearing. The order would go into effect 60 days following its issuance.
Please contact us if you have any questions about the proposed issuance of this order.
Co-authors Keith W. Kaplan, partner, and Nicole S. Haiem, associate, are members of the fund formation practice group within the corporate and securities department at Klehr Harrison.