On June 14, 2016, the SEC issued an order (the “Order”) to increase the net worth threshold for “qualified clients” under Rule 205-3 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”), from $2 million to $2.1 million. Rule 205-3 currently allows an investment adviser to charge a client (a “qualified client”) performance fees if:

  • the client has at least a certain dollar amount in assets under management (currently, $1,000,000) with the investment adviser immediately after entering into the advisory contract;
  • if the investment adviser reasonably believes, immediately prior to entering into the advisory contract, that the client either (A) had a net worth of more than a certain dollar amount (currently, $2,000,000) (the “net worth test”) or (B) is a “qualified purchaser” as defined in Section 2(a)(51)(A) of the Investment Company Act of 1940, as amended, at the time the advisory contract is entered into; or
  • the client is (A) an executive officer, director, trustee, general partner, or person serving in a similar capacity, of the investment adviser or (B) is a “knowledgeable employee” of the investor adviser.

The adjustment to the net worth threshold is being made pursuant to a five-year indexing adjustment required by Section 205(e) of the Advisers Act and Section 419 of the Dodd-Frank Act. The effective date of the increase to the net worth threshold is August 15, 2016. Qualified clients that enter into advisory contracts in reliance on the net worth test prior to the effective date will be “grandfathered” in under the prior net worth threshold.

A copy of the Order is available at: http://www.sec.gov/rules/other/2016/ia-4421.pdf