SEC Raises Qualified Client Threshold

September 08, 2021


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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, as required by the Dodd-Frank Act and section 205(e) of the Advisers Act. The next adjustment for inflation is anticipated in 2026.

SEC's-New-Marketing-Rule

This Order is effective as of August 16, 2021. Under the new limits, a “qualified client” includes (i) a client with at least $1.1 million in assets under management, immediately upon entering into a contract with a registered investment adviser, or (ii) a client who the registered investment adviser reasonably believes has a net worth (together with assets held jointly with a spouse) of more than $2.2 million (not including the client’s primary residence).  For additional details on calculating a client’s net worth, please refer to Rule 205-3.

Registered investment advisers should take action to update their Form ADV Part 2A, compliance policies and procedures manual, and investment advisory agreements to ensure the new thresholds are met (and adequately documented) when engaging in new advisory relationships. The dollar amount adjustment will not generally apply retroactively to previously executed advisory agreements, but will instead take effect on contractual relationships entered on or after the effective date of the Order (i.e., August 16th, 2021).

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If your state registered or SEC registered investment adviser firm is an existing client of RIA Compliance Consultants and has questions about performance fees, we encourage you to speak with your compliance consultant. Or, if you are not an existing client of RIA Compliance Consultants, click here to set up an introductory call with our Business Development Team.

SEC Resources

Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 under the Investment Advisers Act of 1940

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Disclosure

The information contained in this blog post is general in nature intended for educational purposes only and is not intended to be a comprehensive analysis of this topic. It is not intended to constitute compliance consulting advice or apply to any particular investment adviser firm’s specific situation. For more information, please see our Disclosures webpage.

Posted by RCC Admin
Labels: Performance Fee, SEC
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