The Securities and Exchange Commission (SEC) released Final Rule No. IA - 3372 which changes the qualifications for advisers who charge performance fees. We discussed the proposed amendment to the rule in a previous blog post, Performance Based Fee Threshold Increase Sought by SEC in Proposed Order. These amendments are required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, and will take effect 90 days after publication in the Federal Register, which is anticipated shortly. Until then advisers can rely on the grandfather provisions.
While advisers are generally unable to accept performance fees, there are exceptions. For example under certain circumstances, a client may become a "qualified client," under Rule 205-3, meaning he or she is deemed to be capable of bearing the risks associated with performance fee arrangements. Under the new rule, an adviser may charge performance fees to "qualified clients" who have at least $1 million of assets under management for that definition to apply. Under the previous rule, $750,000 in assets were required to be under management. Also, the net worth of an investor may also be a qualification for an exception. The amended rule raises the minimum net worth standard for qualified clients from $1 million to $2 million. (The other "qualified client" basis includes clients who immediately before entering the advisory contract are either executive officers, directors, trustees, general partners of the adviser or employees of the adviser and who have participated in the adviser's investment activities for at least twelve months. This definition has not changed with the amendment.)