Do Your Clients Still Qualify? SEC Tighten Rules on Investment Advisory Performance Fees

Registered adviser complianceThe Securities and Exchange Commission has announced that it is tightening its rule on investment advisory performance fees. The amendments are effective on May 22, 2012.

Under the  rule, registered investment advisers may charge clients performance fees if the client’s net worth or assets under management by the adviser meet certain dollar thresholds. Investors who meet the net worth or asset threshold are deemed to be “qualified clients,” able to bear the risks associated with performance fee arrangements.

The amended Rule 205-3.15 makes the following important changes:

  • The revised rule will require “qualified clients” to have at least $1 million of assets under management with the adviser, up from $750,000, or a net worth of at least $2 million, up from $1.5 million. These rule changes conform the rule’s dollar thresholds to the levels set by a Commission order in July 2011.
  • The amended rule will exclude the fair market value of a client’s primary residence and indebtedness secured by the primary residence up to such value from the net worth calculation; the change was not required by the Dodd-Frank Act, but is consistent with changes the Commission approved in December to net worth calculations for determining who is an “accredited investor” eligible to invest in certain unregistered securities offerings.
  • Under the new rule, every five years, the SEC will issue an order making inflation adjustments to the dollar thresholds used to determine whether an individual or company is a qualified client.

Grandfather Provision

It is important to note that the amended rule does contain a grandfather provision. It will permit registered investment advisers to continue to charge clients performance fees if the clients were considered “qualified clients” before the rule changes in May. In addition, the grandfather provision will permit newly registering investment advisers to continue charging performance fees to those clients they were already charging performance fees.

How We Can Help Ensure Compliance

Of course, this post provides only a brief overview of the compliance issues facing advisers in the coming months. Therefore, you should consult with experienced counsel to meet the new rule.

Eckerle Law offers a highest-quality and cost-effective alternative to the traditional law firm model for a wide variety of transactional and regulatory matters serving all your business law needs. Our experienced attorneys also provide a full range of compliance services for investment advisers, offering compliance tools that are tailored to fit the ever changing regulatory landscape as well as your business needs.

If your company would like to strengthen its business practices, please contact us today so we can leverage our experience to create real-life business and legal solutions to help your business thrive.