Haynes and Boone's Newsroom

Adjustments to Qualified Client Standard
09/01/2011
Taylor H. Wilson, Evan Hall

Pursuant to an order recently issued by the Securities and Exchange Commission (the “SEC”), the dollar amount thresholds in the definition of “qualified client” under Rule 205-3 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), are set to increase effective as of September 19, 2011.

Background

Section 205(a)(1) of the Advisers Act generally prohibits a registered investment adviser from entering into any advisory contract that provides for compensation based on a share of the capital gains or capital appreciation of a client’s account or any portion thereof (i.e., a “performance fee”). Rule 205-3 under the Advisers Act provides an exemption from this performance fee prohibition, permitting a registered investment adviser to enter into performance fee arrangements with “qualified clients.” “Qualified clients” currently are defined in Rule 205-3 as persons who satisfy one or both of the following tests (among others): 

  • Natural persons or companies that have at least $750,000 (the “AUM Threshold”) under the management of the adviser, or 
  • Natural persons or companies that have a net worth of more than $1.5 million (the “Net Worth Threshold”) at the time the advisory contract is entered into.

Adjustment to Dollar Amount Tests

On September 19, 2011, the AUM Threshold will increase from $750,000 to $1 million and the Net Worth Threshold will increase from $1.5 million to $2 million. In addition to the foregoing, please note that (i) the value of a person’s primary residence will be excluded for purposes of determining whether a person satisfies the Net Worth Test, and (ii) each of the thresholds will be adjusted by the SEC for inflation at least once every five years.

Required Action

Fund managers and other investment advisers relying on Rule 205-3 under the Advisers Act should revise their offering documents and subscription agreements, as appropriate, to incorporate the recent adjustments to the “qualified client” definition.

For additional information regarding the recent adjustments to the “qualified client” definition, please contact one of the attorneys listed below. You may also view the alert in the PDF linked below.

Taylor H. Wilson
214.651.5615

 

Evan K. Hall
214.651.5831

 

Katherine Addleman
214.651.5783

 

Richard M. Fijolek
214.651.5570

 

Vicki L. Martin-Odette
214.651.5674

 

Rick A. Werner
212.659.4974

 

David Siegal
212.659.4995

Adjustments_to_Qualified_Client_Standard.pdf