Compliance Solutions for Investment Advisers

Compliance Alert! Performance Fees

Dear Compliance Professional,

Dodd-Frank is certainly keeping us all busy. On July 12, 2011, the SEC issued an order adopting changes to the standard for charging clients a performance fee.

Background

The Advisers Act generally prohibits an investment adviser from entering into, extending, renewing, or performing any investment advisory contract that provides for performance compensation. Advisers Act Rule 205-3 exempts an adviser from the prohibition on charging clients a performance fee (e.g,, a fee based on a share of capital gains on, or capital appreciation of, the funds of a client). In order to qualify for this exemption, however, the client being charged the performance fee – referred to as a “qualified client” – must meet a certain financial standard.

Qualified Client

The SEC increased the monetary threshold for the “qualified client” standard as follows:

  1. A natural person who or a company that immediately after entering into the contract has at least $1,000,000 [up from $750,000] under the management of the investment adviser; or
  2. A natural person who or a company that the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $2,000,000 [up from $1,500,000] at the time the contract is entered into.

This new standard will be adjusted every five years to account for inflation.

Grandfathering Provision

If an investment adviser entered into a contract that satisfied the conditions of the rule that were in effect when the contract was entered into, the adviser will be considered to satisfy the conditions of the rule.

Stay tuned for more . . . .

 

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