SEC Adjusts 'Qualified Client' Threshold for Advisor Performance Fees

What You Need to Know

  • 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.
  • Advisors can charge performance fees only to clients who exceed this threshold.

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.”

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