SEC Intends to Raise Threshold for Performance-Based Investment Advisory Fees - 13 May 2021

According to a May 10, 2021 release from the Securities and Exchange Commission (the "Commission" or "SEC"), an investment adviser may not charge clients a performance-based fee unless the client has a net worth of at least $2.2 million.  The Commission is mandated by 17 C.F.R. § 275.205-3(e) ("Rule 205-3") to adjust the dollar amount thresholds set forth in the rule every five years. 

The Investment Advisers Act of 1940 (the “Advisers Act”) generally prohibits advisers from entering into, extending, renewing, or performing any investment advisory contract that provides for compensation to the adviser based on a share of capital gains on, or capital appreciation of, the funds of a client. An exemption exists for advisers whose clients' wealth or assets under management are above certain thresholds.  Clients with assets eclipsing the thresholds set forth in the Advisers Act are classified as “qualified clients.”

Pursuant to section 418 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Rule 205-3(e), the SEC intends to issue an order implementing the required inflation adjustment to the assets-under-management test and the net worth test in the definition of "qualified client" in Rule 205-3. The Commission intends to raise the dollar amount of the assets-under-management threshold from $1,000,000 to $1,100,000, and would increase the dollar amount net worth threshold from $2,100,000 to $2,200,000.

These increases take into account the effects of inflation by reference to historic and current levels of the PCE Index.  This planned adjustment will be the third adjustment effected by the Commission.

More information can be found in Commision Relase No. IA-5733.