On May 10, 2011, the Securities and Exchange Commission ("SEC") published a notice of its proposed amendments to Rule 205-3 under the Investment Advisers Act of 1940 ("Advisers Act"). The proposal is in response to a requirement under the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") that the SEC take certain actions by July 21, 2011.

Qualified Clients: Increase to Net Worth and Assets Under Management Thresholds

Rule 205-3 (the "Rule") is an exemption from Rule 205(a)(1), which generally prohibits SEC registered investment advisers from charging performance-based fees. Currently, the Rule permits SEC registered investment advisers to charge performance fees to "qualified clients," which is defined as clients that have either (1) a net worth of at least $1.5 million or (2) at least $750,000 in assets under management with the adviser. Pursuant to Section 418 of Dodd-Frank, the new proposed thresholds are increased to (1) $2 million for the net worth threshold and (2) $1 million for the assets under management threshold. Section 418 also requires adjustments to these thresholds every five years.

In connection with the calculation of net worth for purposes of determining "qualified clients," the SEC has also proposed to exclude the value of the client's primary residence, which would have the effect of decreasing the client's net worth by any debt secured by the property in excess of the fair market value of that residence. This change, though not required by Dodd-Frank, parallels the mandated changes earlier this year to the definition of "accredited investor" under Regulation D of the Securities Act of 1933.