September 26, 2021

Volume XI, Number 269

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September 24, 2021

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September 23, 2021

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SEC Raises Qualified Client Thresholds

Effective August 16, 2021, there will be new financial thresholds for determining whether an investor of a registered investment adviser (RIA) is a “qualified client” under Rule 205-3 of the Investment Advisers Act of 1940, as amended (Advisers Act) and can thus be charged performance-based fees.1 The assets-under-management test will increase from $1,000,000 to $1,100,000 and the net worth test will increase from $2,100,000 to $2,200,000.

The Securities and Exchange Commission (SEC) issued an order on June 17, 2021 describing these changes and the reasoning therefor.

The increases to the financial thresholds are required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which amended section 205(e) of the Advisers Act to provide that every five years beginning on July 21, 2011 the SEC must adjust these threshold amounts to account for inflation by rounding to the nearest multiple of $100,000 based on the Personal Consumption Expenditures Chain-Type Price Index published by the U.S. Department of Commerce.

The increased threshold amounts apply to new investors and to existing investors that are making new commitments, but are not retroactive, so that advisory agreements entered into before August 16, 2021 need not be amended. However, any new or existing private funds (that are still accepting new commitments) will need to revise their offering documents, subscription agreements, and advisory agreements to reflect the new thresholds.

1While Rule 205(a)(1) under the Advisers Act prohibits an RIA from entering into an advisory agreement where it will charge its clients a performance-based fee (such as carried interest or an incentive fee), Rule 205-3 provides an exemption if the client is a “qualified client.” A “qualified client” is a person who has a certain dollar amount in assets under management (now $1,100,000) with the RIA immediately after entering into the advisory agreement (the “assets-under-management test”) or if the RIA reasonably believes, prior into entering into the advisory agreement, that such person has a net worth of more than a certain dollar amount (now $2,200,000, the “net worth test”).

© 2021 Vedder PriceNational Law Review, Volume XI, Number 181
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About this Author

Joseph Mannon, Investment Lawyer, Vedder Price Law Firm
Shareholder

Joseph M. Mannon is a member of Vedder Price P.C.’s Investment Services group.

Mr. Mannon focuses his practice on legal and compliance matters for investment advisers, mutual funds, closed-end funds and unregistered vehicles such as hedge funds, hedge fund of funds and other investment entities.  With regard to unregistered vehicles, he frequently counsels clients on fund formation and structuring matters for funds organized both in the United States and abroad.  He also counsels clients on issues relating to commodity trading advisers and...

312-609-7883
 Robert M. Crea Investment Services Attorney Vedder Price San Francisco, CA
Shareholder

Robert M. Crea is a Shareholder at Vedder Price and a member of the firm’s Investment Services group in the San Francisco office.

Mr. Crea counsels investment advisers, private fund managers and broker-dealers on a variety of fund formation, product structuring, regulatory and compliance, performance presentation and securities law matters. He regularly works with clients to structure and document U.S. and offshore private investment funds and assists clients with a variety of state and federal regulatory and compliance issues. He represents pension plans and other institutional...

415-749-9504
Jeff VonDruska Investment Services Lawyer Vedder Price Law Firm
Shareholder

Jeff VonDruska is a Shareholder in the Chicago office of Vedder Price and a member of the firm’s Investment Services practice group.

His practice includes the representation of investment advisers, family offices, private funds, registered mutual funds, closed-end funds, exchange-traded funds and other financial institutions on a broad range of legal, regulatory, governance, formation and compliance matters.

Mr. VonDruska has significant experience in regulatory and compliance matters affecting investment advisers, including registration and marketing. He also counsels...

312-609 7563
Rachel Behar Investment Fund Attorney Vedder Price New York
Associate

Rachel Behar is an Associate in Vedder Price’s New York office and a member of the firm’s Investment Services group.

Ms. Behar concentrates her practice on representing private and registered investment funds, investment advisers, broker-dealers and financial institutions in a variety of legal, regulatory, formation, governance and compliance matters. She frequently assists private equity clients in fund formation matters, and works with them to structure and document private investment fund complexes.

Ms. Behar has...

212-407-7641
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