SEC Elaborates on Issue of Qualified Client Statuses of Specific Private Investors

At the start of November 2013, the Securities and Exchange Commission’s (SEC) Investment Management Division released a Guidance Statement to address certain inquiries regarding the determination of the “qualified client” status under Rule 205-3 of the Investment Adviser’s Act of 1940. Specifically, Rule 205-3 allows an investment adviser to charge a client a fee that is based on the “share of capital gains upon or capital appreciation of the client’s funds” (commonly referred to as “performance based compensation”), so long as the client is deemed a “qualified client”, which is defined in part as a client who has $1,000,000 or more under management with the adviser.

Since the passing of the Dodd-Frank Act in 2010, questions about what assets can be counted toward that threshold have arisen from investment advisory firms that are relying on the American Bar Association’s No-Action Letter (January 18, 2012).

The Guidance Statement specifies that the SEC staff “would not object” if certain firms, who operate a single advisory business through separate investment advisers, consider for purposes of calculating the $1 million base the combined amount a client has invested in all the private funds managed by the related investment advisers, even if the amount invested separately in each such private fund does not equal $1 million.

For more information, or for assistance on other compliance topics, please contact us at (619) 278-0020, or email us at info@corecls.com.

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