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. The SEC increased the threshold requirements for “qualified clients” to account for inflation, which the Dodd-Frank Act and section 205(e) of the Advisers Act require it to do every 5 years.
This Order is effective as of August 15, 2016.
Under the revised rule, in order for an investment adviser to charge a performance fee, the client must have $1 million ($1,000,000) 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 $2.1 million ($2,100,000) at the time the advisory contract is entered into to satisfy the net worth test. The previous net worth requirement was $2 million ($2,000,000). The dollar amount adjustment will not generally apply retroactively, but would instead take effect on new contractual relationships entered into on or after the effective date (August 15, 2016).
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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.