19 April 2024

SEC Adjusts 'Qualified Client' Threshold for Advisor Performance Fees

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The Securities and Exchange Commission approved Thursday increasing the thresholds of the assets-under-management test and the net worth test for when an advisor is allowed to charge performance fees to “qualified investors.”

As of Aug. 16, the dollar amount of the AUM test will increase from $1 million to $1.1 million, and the dollar amount of the net worth test will increase from $2.1 million to $2.2 million.

On May 10, the agency published a notice of intent to issue an order stating that it planned to adjust these amounts for inflation.

The Investment Advisers Act of 1940 generally prohibits an investment advisor from entering into, extending, renewing or performing any investment advisory contract that provides for compensation to the advisor based on a share of capital gains on, or capital appreciation of, the funds of a client (also known as performance compensation or performance fees), the SEC explains.

However, the Act has a carve-out where an advisor is allowed to charge performance fee to a “qualified client.”

The qualified client is defined by assets under management or net worth.

The Dodd-Frank Act required the SEC to adjust for inflation every five years the amount at which AUM and net worth are set.

The amount was originally set in 2011 and has been adjusted once, in 2016.

The 2021 dollar amounts — which are rounded to the nearest multiple of $100,000 as required by section 205(e) of the Advisers Act — would reflect inflation from 2016 to the end of 2020, the SEC said.

A qualified client means a natural person who, or a company that, the investment advisor entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $2.2 million, the SEC explains.

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