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.