The SEC recently proposed to increase the net worth standard for individuals under the “Qualified Client” standard from $2,000,000 to $2,100,000 to account for inflation. Rule 205-3 exempts an investment adviser from the general prohibition against charging performance-based fees provided the client is a “Qualified Client.” Generally, an individual will be considered a Qualified Client if he or she meets the net worth standard or has assets under management with the investment adviser of at least $1,000,000. In its proposal, the SEC did not propose changing the assets under management threshold.
Additionally, the SEC announced that for existing relationships, the proposed change to the Qualified Client standard generally would not apply retroactively. Assuming the proposed change to the Qualified Client standard becomes effective, investment advisers affected by the change will need to update their documents and agreements, accordingly.
The Qualified Client standard was last revised in 2011 when the SEC increased the net worth threshold from $1,500,000 to $2,000,000 and the assets under management threshold from $750,000 to $1,000,000. The most recent proposal is the result of a mandatory review under the Dodd-Frank Act, which required the SEC to adjust the dollar amount thresholds on or about May 1, 2016 and every five years thereafter.