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SEC Increases Performance Fee Net Worth Threshold for Qualified Clients

Effective August 15, 2016, the net worth threshold for qualified clients under SEC Rule 205-3 is increased from $2 million to $2.1 million.

If you have advisory agreements or subscription agreements that require a client or investor to be a “qualified client” as defined in Rule 205-3 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), any reference to a net worth of $2,000,000 should be increased to $2,100,000 by no later than August 15.

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:

(a) 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); or

(b) 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 Securities and Exchange Commission (SEC) to adjust the dollar amounts in these tests for inflation every 5 years beginning in 2011. For the required 2016 adjustment, the SEC has issued an order revising the net worth test to $2.1 million. The SEC is not changing the assets-under-management test.

As a result, as of the August 15, 2016 effective date, the assets-under-management test will remain at $1 million and the net worth test will be $2.1 million. Under Rule 205-3, the new net worth threshold generally does not apply retroactively to agreements entered into before the effective date of August 15, 2016.

© 2022 Neal, Gerber & Eisenberg LLP.National Law Review, Volume VI, Number 222
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About this Author

Michael Gray, Partner, Neal Gerber Eisenberg Law Firm
Partner

Michael B. Gray concentrates his practice in mergers and acquisitions, private equity, venture capital, hedge funds, fund formations, and intellectual property. He represents investors, companies, and executives in private equity and venture capital transactions; mergers, acquisitions and restructurings; executive compensation; general contract and intellectual property agreements and the structuring of partnerships, corporations and limited liability companies. He also has extensive experience advising investors in funds and advising funds on their formation and compliance needs (both on-...

312-269-8086
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