New Qualified Client Standards Take Effect on September 19
The Investment Advisers Act of 1940 allows an investment adviser to charge a client performance fees only if the client’s asset or net worth meets minimum criteria. The SEC has issued an order setting September 19, 2011 as the date that higher qualification standards become effective. The new thresholds are $1 Million under management with the adviser or more than $2 Million in net worth (before September 19, it was $750,000 and $1,500,000). If the adviser is managing a pooled investment vehicle that is relying on Section 3(c)(1) of the Investment Company Act of 1940, the adviser is required to look through the vehicle to the underlying investors.
Other proposed amendments are still under consideration including revising the net worth test to exclude the primary residence and the grandfathering of existing clients. The higher standards only apply to new clients.
Advisers should keep the new thresholds in mind when signing new clients.
Firms should amend disclosure documents and subscription and management agreements if they manage funds that rely on Section 3(c)(1) of the Investment Company Act. Also, expect that these levels will rise over time, as the SEC has indicated that it will adjust the thresholds with inflation.