SEC Proposes Adjustments to Advisers Act "Qualified Client" Standard


The Securities and Exchange Commission has proposed amendments to Rule 205-3 under the Investment Advisers Act of 1940, as amended (the Advisers Act), to revise the definition of "qualified client." Under Rule 205-3, accounts of qualified clients are exempted from the Advisers Act's general prohibition against SEC-registered investment advisers charging performance-based fees to their advisory clients. Currently, a qualified client generally includes any client that has either (1) $750,000 or more under management with the investment adviser or (2) a net worth of at least $1.5 million.

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC is required to adjust the dollar amount tests set forth in certain of its rules, including the qualified client definition, for inflation. Under the SEC's proposal, the qualified client definition would be revised to increase the "assets under management" threshold described above from $750,000 to $1 million and the "net worth" threshold from $1.5 million to $2 million. In addition, the revised definition would exclude the value of a natural person's primary residence (and associated secured indebtedness) for purposes of the net worth threshold. The SEC proposal would require the SEC to make similar inflation adjustments every five years.

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