I. Introduction
On February 15, 2012, the U.S. Securities and Exchange Commission (the “SEC”) issued a final rule release (the “Adopting Release”) amending Rule 205-3 (the “Rule”) of the U.S. Investment Advisers Act of 1940, as amended (the “Advisers Act”), pursuant to the requirements of Section 418 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Rule amendments will become effective on May 22, 2012 (the “Effective Date”)2 and will provide for the following new requirements:
- Codification of the increase in the dollar thresholds used to determine whether an investment advisory client is a “qualified client” implemented by an SEC order on July 12, 2011;
- A modified net worth test for “qualified clients,” including a provision that excludes the value of a person’s primary residence and certain debt secured by the residence from the calculation of net worth under the Rule;
- Revised transition provisions of the Rule to allow for the continuation of certain arrangements (including certain new investments under such arrangements) that were permissible at the time the adviser and client entered into the advisory agreement; and
- A requirement for the SEC to issue periodic orders to adjust the dollar thresholds used to determine the qualified client standard to account for inflation.
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