SEC Adopts Inflation-Based Adjustment to "Qualified Client" Thresholds

July 13, 2016

The U.S. Securities and Exchange Commission issued a final order (Order) on June 14, 2016, to adjust for inflation the “qualified client” thresholds applicable when a registered investment adviser charges a performance fee in reliance on Rule 205-3 (Rule) under the Investment Advisers Act of 1940 (Advisers Act). The new thresholds take effect on August 15, 2016.

Highlights of the Order include:

  • Increase in thresholds for “qualified client” determination: The Commission performed an inflation calculation using the Personal Consumption Expenditures Chain-Type Price Index (PCE Index). Based on inflation, the Commission raised the qualified client net worth requirement from $2 million to $2.1 million. Because the effect of inflation on the assets under management (AUM) threshold was less than the applicable rounding threshold, the AUM threshold remains at $1 million.
  • No retroactive application for contracts/investments already in place: The Rule does not retroactively apply to contracts/fund investments in existence prior to the effective date. However, if a natural person or company that was not a party to the contract becomes a party on or subsequent to August 15, 2016, the increased thresholds will apply to the new party.
  • No changes to Section 3(c)(7) or non-U.S.-resident exemptions: Section 205(b) of the Advisers Act exempts certain investment advisory contacts and clients from the general ban on performance fees, including those with Section 3(c)(7) funds and non-U.S. residents. The Order does not alter these exemptions.

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