On May 10, 2011, the SEC gave notice of its intent to issue an order that would adjust for inflation the dollar amount tests for determining if a person is a “qualified client” for purposes of Rule 205-3 under the Advisers Act, which permits investment advisers to charge a performance fee to “qualified clients.” Currently, a person would be considered a “qualified client” for purposes of Rule 205-3 if the person had at least $750,000 under the management of the adviser immediately after entering into the advisory contract or the adviser reasonably believed that the person had a net worth of more than $1.5 million at the time the advisory contract was entered into. The SEC’s order will increase these thresholds to $1 million and $2 million, respectively. In addition to stating its intent to adjust the dollar amount tests for determining if a person is a “qualified client,” the SEC also proposed further amendments to Rule 205-3 to: (1) provide that the SEC will adjust the dollar amount thresholds for inflation approximately every five years; (2) exclude the value of a person’s primary residence for purposes of determining a person’s net worth under the Rule; and (3) clarify that the amended Rule requirements would apply to new contractual arrangements and not to existing contractual arrangements, except that new parties to existing contracts would be subject to the amended Rule requirements.

Comments on the proposals are due by July 11, 2011. The SEC intends to issue the order adjusting the dollar amount tests of Rule 205-3 by July 21, 2011 in accordance with the requirements of the Dodd-Frank Act.