The U.S. Securities and Exchange Commission (“SEC”) recently finalized revisions to Rule 205-3 under the Investment Advisers Act of 1940, raising the net worth requirements for individuals who are charged performance fees. As we discussed earlier, the SEC increased the threshold requirements for “qualified clients” to account for inflation.
Under the revised rule, in order for an investment adviser to charge a performance fee, the client must have $1 million under management at the time an advisory contract is entered into with the investment adviser to satisfy the assets-under-management test or the investment adviser must reasonably believe that the client has a net worth of more than $2 million at the time the advisory contract is entered into to satisfy the net worth test. It is important to note that this rule does not apply to existing relationships; it only applies to contracts entered into on or after the effective date. While these new rules came into effect last September as part of the SEC’s order, this release will codify those rules.
Additionally, this rule release finalizes a provision that excludes the value of an individual’s residence from the net worth calculation and includes a full disclosure on how future inflation adjustments will be calculated. These provisions will go into effect on May 22, 2012.
To read the full release, click here.
To the extent your investment advisor charges a performance fee, you should verify and document that any new clients meet these performance fee requirements and correspondingly update your written supervisory policies and procedures and client agreement.