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 to schedule a consultation.

GENERAL DISCLAIMER: Information contained within this blog does not create a business-client relationship, and none of the content of this blog can be deemed to be consultive business advice.

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