SEC Proposes Changes to Performance Based Fee Requirements for Investment Advisers

May 12, 2011

The United States Securities and Exchange Commission (“SEC”) recently proposed a rule that would increase the dollar requirements that must be met before an investment adviser can charge performance based fees.

Currently, under Rule 205-3 of the Investment Advisers Act of 1940, an SEC registered investment adviser can charge a performance based fee if the client is considered a “qualified client”. To meet this standard, the SEC registered investment adviser must manage more than $750,000 for the client or the client needs to have a net worth greater than $1.5 million.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, these amounts are required to be adjusted for inflation. Accordingly, the SEC is proposing the following the new thresholds in order for a client to be considered as a “qualified client”: the investment adviser must manage at least $1 million of assets for the client or the client needs to have a total net worth of greater than $2 million. Included in the proposed SEC rule are details on how future inflation adjustments will be made and a grandfather provision for existing advisory contracts. The proposed SEC rule also contains a provision that would exempt primary residences from the net worth standard.

The SEC is currently seeking public comments on this proposed rule change. Click here to view the full rule.

Posted by Bryan Hill
Labels: Performance Fee, SEC, Uncategorized