As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the U.S. Securities and Exchange Commission (“SEC”) recently amended Rule 205-3 of the Investment Advisers Act of 1940, which exempts a “qualified client” from the general prohibition against an investment advisor charging a fee based upon the share of capital gains or capital appreciation (also known as a “performance fee”).
Effective today, September 19, 2011, the amended SEC Rule 205-3 only allows an investment advisor to charge performance fees if the client has at least $1 million (raised from $750,000) in assets under the management with the investment advisor or if the investment advisor believes that the client has a net worth of more than $2 million (raised from $1.5 million). Additionally, the amended SEC rule specifies that the client’s personal residence and any debt associated therewith are to be excluded when determining the net worth of the client, but should include assets held jointly with a spouse. For the full details of the amended SEC rule, please click here.
To the extent your investment advisor charges a performance fee, you should verify and document that such clients meet these new performance fee requirements and correspondingly update your written supervisory policies and procedures and client agreement.