New Requirements for Clients Charged Performance Based Compensation by Registered Investment Advisers

The SEC recently adopted amendments to Rule 205-3 under the Investment Advisers Act of 1940 which raises the net worth and assets under management eligibility requirements for "qualified clients" who may pay performance fees to a registered investment adviser. [1]   A "qualified client" now requires an individual or entity to have a minimum of $1 million in assets under management with the adviser or a net worth exceeding $2 million. [2] The revised rule also excludes the value of a client’s primary residence and certain property-related debts from the net worth calculations. [3] A grandfather provision has been included in the amendment to Rule 205-3 which permits a registered investment adviser to continue charging existing advisory clients performance-based compensation if the clients were classified as "qualified clients" before the rule change.  Additionally, the grandfather provision permits newly registered investment advisers to continue charging performance-based compensation to those existing advisory clients the investment adviser was previously charging such compensation to prior to such investment advisor becoming registered.

The revised rule also requires the SEC to make periodic inflation adjustments (every five years) to the dollar thresholds used to determine whether an individual or company is a "qualified client".

Private investment funds will need to update their subscriptions documents for the new definition of "qualified client" accordingly.

For further information, please contact:

Lance Friedler Partner 212.573.8030 lfriedler@sglawyers.com

Micah Nessan Associate 212.573.8034 mnessan@sglawyers.com -------------------------------

[1] Final Rule Release No. IA-3372, Investment Adviser Performance Compensation. [2] See Rule 205-3(d) [3] See Rule 205-3(d)(1)(ii)(A)

Information contained herein was prepared by Sadis & Goldberg LLP for general informational purposes for clients and friends of Sadis & Goldberg LLP.  Its contents should not be construed as legal advice, and readers should not act upon the information in this Alert without consulting counsel.  This information is presented without any representation or warranty as to its accuracy, completeness or timeliness.  Transmission or receipt of this information does not create an attorney-client relationship with Sadis & Goldberg LLP.  Electronic mail or other communications with Sadis & Goldberg LLP cannot be guaranteed to be confidential and will not create an attorney-client relationship with Sadis & Goldberg LLP.

Cheryl Spratt