Pursuant to an order entered by the Securities and Exchange Commission (“SEC”) on June 14, 2016, the exemption contained under Rule 205-3 of the Investment Advisers Act (“Advisers Act”), which allows registered investment advisers to charge performance-based compensation to clients notwithstanding the general prohibition against same contained in Section 205(a)(1) of the Advisers Act, will be slightly modified. This modification is the result of a provision in the Dodd-Frank Act (“Dodd Frank”) implementing a provision of that act under Rule 205-3, which requires the SEC to adjust the dollar amounts contained in the exemption for inflation and to round the adjustment to the nearest $100,000.00. This adjustment must occur every five years.
Currently, Rule 205-3 allows registered investment advisers to charge performance-based fees to a “qualified client,” which is defined as a client who either: (1) has at least $1 million of assets under management with the adviser; (2) has a net worth, either jointly or with the client’s spouse, of more than $2 million, excluding the value of the client’s primary residence; (3) is a qualified purchaser as defined in Section 2(a)(51) of the Investment Company Act of 1940; or (4) is a “knowledgeable employee” of the adviser.
As a result of the inflation adjustment required by Dodd-Frank and the implementing rule provision, effective August 15, 2016 the dollar amount of the net worth test will increase to $2.1 million. The threshold for the test based upon the client’s assets under management will remain at $1 million. The change only effects new contractual relationships, as contractual relationships entered into before the effective date of the new rule are grandfathered.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our website for more information.