Effective as of August 15, 2016, the net worth threshold for qualified clients under Investment Advisers Act Rule 205-3 will increase from $2 million to $2.1 million.

On June 14, 2016, the Securities and Exchange Commission issued an order approving an inflation adjustment for the dollar amount tests in Rule 205-3 of the Investment Advisers Act of 1940. Generally, registered investment advisers are prohibited by section 205(a)(1) of the Advisers Act from collecting performance-based compensation. Rule 205-3 provides an exemption from this prohibition for clients that meet the definition of a “qualified client.” Currently, to qualify as such, a client must (1) have at least $1 million of assets under management with the adviser, (2) have a net worth (together, in the case of a client who is a natural person, with assets held jointly with a spouse) of more than $2 million (excluding the value of such person’s primary residence and indebtedness secured by such residence), (3) be a “qualified purchaser” as defined in Section 2(a)(51) of the Investment Company Act of 1940, or (4) be a “knowledgeable employee” of the adviser. Section 418 of the Dodd-Frank Act and Rule 205-3 require the SEC to adjust the dollar amounts in these tests for inflation, rounding to the nearest $100,000, beginning July 21, 2011 and every five years thereafter.

Accordingly, effective as of August 15, 2016, the dollar amount of the net worth test will increase from $2 million to $2.1 million. The dollar amount increase takes into account the effects of inflation by reference to historic and current levels of the Personal Consumption Expenditures Chain-Type Price Index. The threshold for the assets-under-management test will remain at $1 million because the amount of the SEC’s inflation adjustment calculation is smaller than the required rounding amount.

Contractual relationships entered into prior to August 15, 2016 that satisfied the conditions of Rule 205-3 then in effect, including those referencing the net worth threshold, will satisfy the conditions of Rule 205-3, but any new contractual relationships (e.g., advisory agreements or subscription agreements) entered into after that date must reflect the adjusted net worth requirement.

Investment advisers who charge performance fees should consult with counsel and update their current investment advisory agreements and investment fund offering documents, as applicable, to conform to the new net worth threshold.