The Securities and Exchange Commission today provided public notice of its intention to raise certain dollar thresholds that would need to be met before investment advisers can charge their clients performance fees. This would satisfy Section 418 of the Dodd-Frank Act which requires the SEC to issue an order to adjust these dollar thresholds for inflation by July 21, 2011 and every five years thereafter.
Currently, Rule 205-3 of the Investment Advisers Act allows an adviser to charge its client’s performance based fees under certain circumstances. Two of these circumstances are:
- The client has at least $750,000 under management with the adviser.
- The adviser reasonably believes the client has a net worth of more than $1.5 million.
As a result of Dodd-Frank Act requirements, the SEC intends to revise these dollar amount tests to $1 million for assets under management and $2 million for net worth. The Commission also proposed amendments to Rule 205-3 that would:
- Provide the method for calculating future inflation adjustments of the dollar amount tests.
- Exclude the value of a person’s primary residence from the determination of whether a person meets the net worth standard
Modify the transition provisions of the rule to take into account performance fee arrangements that were permissible at the time the adviser and client entered into their advisory contract.
The SEC is seeking public comment on these proposed rule amendments.
An order adjusting the dollar amount tests specified in the definition of “qualified client” will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission’s Secretary. Hearing requests should be received by the SEC by 5:30 p.m. on June 20, 2011. Hearing requests should state the nature of the writer’s interest, the reason for the request, and the issues contested.
Comments on the SEC’s proposed rule amendments should be received by July 11, 2011. (Press Rel. 2011-109). All comments should refer to File Number S7-17-11.