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SEC Raises Qualified Client Net Worth And Assets Under Management Thresholds

Highlights

As of Aug. 16, 2021, the SEC has raised the “qualified client” net worth threshold, from $2.1 million to $2.2 million, and the assets under management threshold, from $1 million to $1.1 million

Clients that entered into advisory contracts in reliance on the lower thresholds prior to the effective date will be grandfathered in and still be deemed to meet the “qualified client” definition

Registered investment advisers that rely on Rule 205-3 of the Advisors Act to receive performance or incentive-based compensation from their clients should consider updating their offering and subscription documents to reflect these increases

The Securities and Exchange Commission (SEC) issued an order dated June 17, 2021 that will increase the “net worth” and “assets under management” thresholds for purposes of determining whether an investment advisory client meets the definition of a “qualified client” under Rule 205-3 of the Investment Advisers Act of 1940 (the Advisers Act). The increase of the thresholds will take effect as of Aug. 16, 2021 and was made pursuant to the five-year indexing adjustment required by Section 205(e) of the Advisers Act and Section 419 of the Dodd-Frank Act.

The SEC’s order raised the qualified client “net worth test” from $2.1 million to $2.2 million and raised the “assets under management” test from $1 million to $1.1 million. 

Beginning Aug. 16, 2021, in order to meet the definition of a qualified client, the client of a registered investment adviser must:

  1. Have at least $1.1 million in assets under the management of the adviser immediately after entering into an investment advisory contract with the investment adviser;

  2. Have a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $2.2 million (in the case of a natural person, excluding the value of such natural person’s primary residence and indebtedness secured by such residence) immediately prior to entering into an investment advisory contract;

  3. Be a qualified purchaser as defined under Section 2(a)(51)(A) of the Investment Company Act of 1940 (the Investment Company Act); or

  4. Be a “knowledgeable employee” of the investment adviser, as defined under Rule 3c-5 promulgated under the Investment Company Act. 

Clients that entered into investment advisory contracts prior to the effective date in reliance on the lower net worth or assets under management thresholds will be grandfathered in under the prior net worth threshold and not be impacted. After Aug. 16, new clients of the adviser, or existing clients entering into new subscriptions or advisory agreements relying on the net worth or assets under management tests, will need to meet the new thresholds in order to fall under the definition of a qualified client. 

The “qualified client” definition is relevant to registered investment advisers that receive performance or incentive-based compensation from their clients. Registered investment advisers are prohibited, under Section 205(a)(1) of the Advisers Act, from receiving such compensation unless all of their clients meet the definition of a “qualified client.” This is particularly relevant for registered investment advisers that advise managed accounts or funds that rely on Section 3(c)(1) of the Investment Company Act, as a client or investor in such funds (or, in certain circumstances, the equity owners of such investors on a “look through” basis) must be a “qualified client” in order for the registered adviser or its affiliates to receive performance fees or carried interest with respect to such client or investor. 

Registered investment advisers that receive performance or incentive-based compensation, including those that advise funds relying on Section 3(c)(1), should consider updating their offering and subscription documents to reflect the new qualified client net worth and assets under management thresholds. 

© 2021 BARNES & THORNBURG LLPNational Law Review, Volume XI, Number 204
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About this Author

Scott Beal New York Corporate Investment Attorney Barnes & Thornburg LLP
Partner

With 15 years of private practice and in-house experience, Scott Beal is a partner in the firm’s corporate department who concentrates on investment management.

Scott focuses his practice on the formation and operation of private investment funds, including hedge funds, private equity funds, venture capital funds, credit funds, cryptocurrency funds, funds of funds and advisory platforms. Scott provides ongoing regulatory and compliance guidance to investment managers and represents institutional and other investors with respect to their...

646-746-2021
Maria Monte New York Private Investment Fund Attorney Barnes & Thornburg LLP
Associate

Maria Monte’s practice is focused on the formation, structuring and operation of private investment funds, as well as providing advice to institutional and other investors regarding potential investments in private funds.

Maria advises private investment fund clients, including private equity funds, hedge funds, credit funds and venture funds, in virtually every step of strategic fundraising, ongoing operation and regulatory compliance. She also represents investors and potential investors in analyzing, evaluating and negotiating such investment...

646-746-2024
Travis Ortiz New York Investment Fund Portfolio Attorney Barnes & Thornburg LLP
Associate

Travis Ortiz advises private investment fund clients in their formation, fundraising, portfolio investment and ongoing operational and compliance efforts.

He has experience advising private equity funds, hedge funds, credit fund, real estate funds, healthcare funds and registered funds.

Prior to joining the firm, Travis was an associate in the investment management group of the New York office of another global law firm. 

646-746-2027
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