SEC Raises Dollar Amount Thresholds for Charging Performance Fees

On July 12, 2011, the SEC issued an order that raises the thresholds for whether investment advisers can charge performance fees to clients. The order was mandated by the Dodd-Frank Act, which required the SEC to adjust these dollar amount thresholds for inflation by July 21, 2011 and every five years thereafter. The order effectively amends Rule 205-3 under the Advisers Act, which exempts an investment adviser from the prohibition against charging performance fees in certain circumstances, including when the client is a “qualified client.” Currently, Rule 205-3 includes within the definition of “qualified client” any person that has (i) at least $750,000 in assets under management with the investment adviser or (ii) has a net worth at the time of investment of at least $1.5 million. Effective September 19, 2011, these two dollar amount thresholds will be raised to $1 million and $2 million, respectively.

Accordingly, pursuant to the order, advisers will be permitted to charge performance-based fees1  for clients who, at the time of entering into the advisory contract, have either (i) $1 million in assets under management with the adviser or (ii) a net worth of at least $2 million. Because the order states that these thresholds apply at the time the client enters into the contract, advisers will not need to re-qualify existing investors in private funds or separate account clients that met the previous definition of “qualified client” at the time the contract was entered into. Notably, since these requirements apply to both separately managed accounts and investors to private funds, private fund advisers that charge incentive allocations or other types of performance fees should revise their offering and subscription documents to reflect the new parameters. Where applicable, advisers to separately managed accounts also will need to revise their investment management agreements to comply with the new requirements going forward.

For assistance in revising the applicable documents to reflect the new qualified client thresholds, or for additional information relating to the SEC’s order, please contact Zac Rosenberg, Compliance Consultant by email at zachary.rosenberg@corecls.com or by phone at (619) 278-0020.


1 Fees based on a share of the capital gains upon, or the capital appreciation of, the funds of a client