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Revised Performance Fee Rule now effective, are you in compliance?

Thursday, May 24, 2012

Revised provisions under the Advisers Act, Rule 205-3, are effective as of 5/22/2012. As an Investment Adviser, you may charge performance based fees providing natural person(s) meet minimum assets under management or net worth tests. If you currently charge performance based fees we recommend you review the rule, changes to the accredited investor definition, and updated provisions to ensure your firm’s policies and procedures are in compliance.

Red Oak is providing this guide to highlight the new requirements and the grandfather provisions.


The Dodd-Frank Act amended section 205(e) of the Advisers Act , requiring the SEC to revise the definition of qualified or accredited investor, taking into account inflation as well as provide an exclusion of the client’s primary residence in the calculation of net worth. In response, the SEC has amended section 205(e) of the Advisers Act and Rule 205-3 with the following:

  • The SEC adjusted for inflation the AUM dollar amount thresholds as well as the net worth standards under the definition of “accredited investor” or “qualified client”. Paragraph (d) has been adjusted to require a minimum of $1 million of assets under management with the adviser OR a net worth of a minimum of $2 million. Client’s primary residence and specified residence secured debts are EXCLUDED from the calculation. Debt secured by the primary residence, in excess of the fair market value OR obtained within 60 days of entering into the advisory contract, will count as a liability against the clients net worth calculation.
  • The SEC is now required to review the thresholds every 5 years and issue an order adjusting as necessary.
  • The SEC now identifies the price index future increases will be based upon, the Personal Consumption Expenditures Chain-Type Price Index (“PEC Index”) published by the Department of Commerce.

Grandfather Provisions

The SEC included grandfather provisions in the revisions, Advisers may rely on the grandfather provisions and continue to charge performance fees if:

  • Client(s) were considered “qualified clients” prior to rule changes
  • Newly registered advisers, who previously charged performance fees, may continue to charge those clients

These grandfather provisions only apply to existing clients in which a contractual advisory arrangement was entered into prior to the rule’s effective date.


We recommend Advisers review and revise as necessary, policies and procedures, disclosure documents, and client contracts to ensure definitions are consistent with new rules. If you charge performance fees, now is an opportune time for training and education of staff regarding the performance fee rule. Additionally, if you intend to rely on the grandfather provisions, we recommend you compile a record of clients subject to the exemption.

Red Oak Compliance Solutions is available to help. We can provide guidance on all of your compliance needs. For more information or to request information on how we can help, please contact us.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.

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