RIA Compliance Blog
Pursuant to an order entered by the Securities and Exchange Commission (“SEC”) on June 14, 2016, the exemption contained under Rule 205-3 of the Investment Advisers Act (“Advisers Act”), which allows registered investment advisers to charge performance-based compensation to clients notwithstanding the general prohibition against same contained in Section 205(a)(1) of the Advisers Act, will be slightly modified. This modification is the result of a provision in the Dodd-Frank Act (“Dodd Frank”) implementing a provision of that act under Rule 205-3, which requires the SEC to adjust the dollar amounts contained in the exemption for inflation and to round the adjustment to the nearest $100,000.00. This adjustment must occur every five years.
Currently, Rule 205-3 allows registered investment advisers to charge performance-based fees to a “qualified client,” which is defined as a client who either: (1) has at least $1 million of assets under management with the adviser; (2) has a net worth, either jointly or with the client’s spouse, of more than $2 million, excluding the value of the client’s primary residence; (3) is a qualified purchaser as defined in Section 2(a)(51) of the Investment Company Act of 1940; or (4) is a “knowledgeable employee” of the adviser.
As a result of the inflation adjustment required by Dodd-Frank and the implementing rule provision, effective August 15, 2016 the dollar amount of the net worth test will increase to $2.1 million. The threshold for the test based upon the client’s assets under management will remain at $1 million. The change only effects new contractual relationships, as contractual relationships entered into before the effective date of the new rule are grandfathered.
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