Rule 205-3 under the Investment Advisers Act of 1940 permits investment advisers to charge performance- based compensation (including performance and incentive fees by private funds) only to “qualified clients.” On June 14, 2016, the Securities and Exchange Commission amended Rule 205-3 by increasing the net worth test in the rule from $2 million to $2.1 million effective August 15, 2016.

Currently, a “qualified client” is an advisory client (or an investor in a private fund) that at the time of the client’s contract or fund investment:

• has at least $1 million under management with the investment adviser; or
• has a net worth (excluding any primary residence) of more than $2 million.

Advisory clients and fund investors that satisfied the conditions of Rule 205-3 in effect when entering into the advisory contract or making the fund investment will be deemed to satisfy the amended Rule 205-3. However, the amended net worth test under Rule 205-3 must be met at the time of any additions to an existing contract or fund investment.