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

Micah Nessan Associate 212.573.8034 -------------------------------

[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)

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Cheryl Spratt