On July 12, 2011, the Securities and Exchange Commission (“SEC”) approved an order (“Order”) increasing the dollar amount thresholds necessary for an investor to qualify as a “qualified client” under Rule 205-3 under the Investment Advisers Act of 1940 (“Advisers Act”). A “qualified client” is currently defined under Rule 205-3 as an investor that (i) has at least $750,000 in assets under management with the investment adviser or (ii) has a net worth of more than $1.5 million. The Order carries out a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) to adjust the respective thresholds for inflation.
Effective September 19, 2011, the assets under management requirement will be increased to $1 million and the net worth requirement will be increased to $2 million. SEC registered investment advisers (and many state registered investment advisers) are precluded from charging performance-based compensation to investors that are not qualified clients. As such, the increased thresholds will significantly inhibit the ability of affected advisers to charge performance-based compensation to certain investors.
Advisers affected by the Order should contact qualified legal counsel immediately to confirm compliance with the increased thresholds and assure that all subscription agreements and investment management agreements are updated accordingly. Absent further guidance from the SEC, we do not currently believe that existing investors with an affected adviser will need to be recertified as qualified clients, provided such investors do not contribute additional capital to the adviser after September 19, 2011.
The Order can be read in its entirety here.
If you have any questions regarding this alert or related matters, please contact us today.