SEC rules on advisory performance fees

The Securities and Exchange Commission (“SEC”) adopted a rule that will raise the financial requirement for investors who pay performance fees, and exclude the investor’s home value from the net worth calculation. The increase in thresholds was a requirement of the Dodd-Frank Act. Excluding property value was not required by Dodd-Frank, but is consistent with other changes the SEC approved in December to determine who is an “accredited investor,” eligible to invest in certain unregistered securities opportunities.

Under the rule, registered investment advisers may charge clients performance fees if the client’s finances meets certain dollar thresholds, and are deemed to be “qualified clients.” Qualified clients are deemed able to bear the risks associated with performance fee arrangements.

To be considered a qualified client, individuals must have at least $1 million in assets under management with the adviser or a net worth of at least $2 million. Previously, qualified clients were required to have $750,000 under management, and a net worth of $1 million.

A grandfather provision to the ruling permits registered investment advisers to continue to charge clients performance fees for clients who were considered “qualified clients” before the rule change.

Under the revisions, the SEC will make adjustments to the thresholds every five years, accounting for inflation, to determine whether a client is a qualified client.

Read more about the changes in investment thresholds.

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