On February 15, 2012, the Securities and Exchange Commission (the “Commission” or “SEC”) raised the dollar thresholds for SEC-registered investment advisers to charge performance-based fees to their clients and added a new exemption for advisers who were not required to register prior to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).

Background. Section 205(a)(1) of the Investment Advisers Act generally restricts SEC-registered investment advisers from charging performance-based compensation, unless the client satisfies the definition of a “qualified client.” Rule 205-3, adopted in 1985, exempted advisers from this restriction if their clients met either a minimum “assets-under-management test” or, alternatively, a minimum “net worth test.” The Commission deemed those clients to be “financially experienced and able to bear the risks of performance fee arrangements.”

The Dodd-Frank Act required that the Commission adjust for inflation the dollar amount thresholds in its performance fee rules, rounded to the nearest $100,000.

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