Compliance Solutions for Investment Advisers

Compliance Alert! Performance Fees

Dear Compliance Professional, Recently the SEC tightened its rule on investment advisory performance fees by raising the net worth requirement for investors who pay performance fees and by excluding the value of the investor’s home from the net worth calculation. This follows on the heels of the SEC excluding the value of an investor’s home from the net worth calculation when determining accredited investor status. Without making this change, there could have been instances when an investor would meet the (ostensibly) higher qualified client standard, but not the (ostensibly) less stringent accredited investor standard. ……………………………. Under the SEC’s rule, registered investment advisers may charge clients performance fees if the client’s net worth or assets under management by the adviser meet certain dollar thresholds. Investors who meet the net worth or asset threshold are deemed to be “qualified clients,” able to bear the risks associated with performance fee arrangements. The revised rule will require “qualified clients” to have at least $1 million of assets under management with the adviser, up from $750,000, or a net worth of at least $2 million, up from $1.5 million. In addition, the revised rule will exclude the value of a client’s primary residence and certain property-related debts from the net worth calculation. A new grandfather provision to the performance fee rule will permit registered investment advisers to continue to charge clients performance fees if the clients were considered “qualified clients” before the rule changes. In addition, the grandfather provision will permit newly registering investment advisers to continue charging performance fees to those clients they were already charging performance fees. Finally, the revised rule provides that every five years, the SEC will issue an order making inflation adjustments to the dollar thresholds used to determine whether an individual or company is a qualified client, as required by the Dodd-Frank Act. The rule amendments will take effect 90 days after publication in the Federal Register, but investment advisers may rely on the grandfather provisions before then. Click here to view the Final Rule Release in its entirety: Final Rule Release No. IA-3372

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