SEC Raises Performance Fee Net Worth Threshold for Qualified Clients | Practical Law

SEC Raises Performance Fee Net Worth Threshold for Qualified Clients | Practical Law

The Securities and Exchange Commission (SEC) has increased the net worth threshold for qualified clients under Rule 205-3 from $2 million to $2.1 million.

SEC Raises Performance Fee Net Worth Threshold for Qualified Clients

Practical Law Legal Update w-002-6869 (Approx. 3 pages)

SEC Raises Performance Fee Net Worth Threshold for Qualified Clients

by Practical Law Corporate & Securities
Published on 20 Jun 2016 • USA (National/Federal)
The Securities and Exchange Commission (SEC) has increased the net worth threshold for qualified clients under Rule 205-3 from $2 million to $2.1 million.
On June 14, 2016, the Securities and Exchange Commission (SEC) issued an order approving the amendment to Rule 205-3 of the Investment Advisers Act (the Advisers Act), increasing one of the dollar amount tests that permit investment advisers (such as hedge funds, private equity funds, and venture capital funds) to charge performance-based compensation (also known as carried interest) to qualified clients.
Rule 205-3 allows an adviser to charge its clients and investors performance fees if one of the specified dollar amount tests is satisfied. These tests are based on either:
  • The dollar amount of the client's assets under management with the adviser immediately after entering into the applicable investment advisory contract (the assets-under-management test).
  • The adviser's reasonable belief as to the net worth of the client immediately prior to entering into the advisory contract (the net worth test).
Section 418 of the Dodd-Frank Act requires the SEC to adjust the dollar amounts in these tests for inflation, beginning on July 21, 2011 and every 5 years thereafter. On July 12, 2011, the SEC issued an order, effective September 19, 2011, amending Rule 205-3 to increase:
  • The assets-under-management dollar amount from $750,000 to $1 million.
  • The net worth amount from $1.5 million to $2 million.
The SEC has issued an order revising the net worth test to $2.1 million. Because the indexing adjustment required to be made to the $1 million assets-under-management test is smaller than the rounding amount of $100,000 specified in Rule 205-3(e) of the Advisers Act, the SEC is not changing the $1 million assets-under-management threshold at this time.
The effective date of the new net worth threshold is August 15, 2016. Under the transition rules of Rule 205-3, the new net worth threshold generally does not apply retroactively to advisory contracts entered into before the effective date.
For more information on key provisions of the Dodd-Frank Act relating to hedge funds and private equity funds, see Summary of the Dodd-Frank Act: Private Equity and Hedge Funds.
For more information on additional requirements and rulemaking activities under the Dodd-Frank Act, see Road Map to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.