SEC To Adjust "Qualified Client" Dollar Thresholds For Investment Adviser Performance Fee Rule, Implementing Requirements Imposed By Dodd-Frank
By The Investment Management Practice
On May 10, 2011, the Securities and Exchange Commission (SEC) provided notice of its intent to issue an order which will adjust certain dollar thresholds in Rule 205-3 of the Investment Advisers Act of 1940 (the Advisers Act), the rule which permits investment advisers to charge a performance fee to qualified clients. The SEC also proposed amending Rule 205-3 to (i) require adjustments of these dollar amount thresholds every five years and (ii) exclude a persons primary residence from the test of whether a person has sufficient net worth to be considered a qualified client.
The SEC has also proposed transition rules that would (i) apply the revised qualified client dollar thresholds prospectively, so that arrangements permissible at the time they were entered into are not later required to be renegotiated either as a result of this amendment or future inflation adjustments, and (ii) effectively grandfather clients of advisers who were not previously registered with the SEC but are now required to register as an investment adviser under Dodd-Frank. The SEC is accepting comment on the proposed inflation adjustment rule, the proposed treatment of primary residence in the calculation of net worth, and the proposed transition rules until July 11, 2011.