Qualified Client Standard Raised - Effective September 19, 2011

An order approved by the Securities and Exchange Commission ("SEC") on July 12, 2011 will impact all SEC registered investment advisers (and certain state registered investment advisers) that provide advisory services to investment funds and/or separately managed accounts and receive performance-based compensation for such advisory services. The SEC's order raises the financial thresholds necessary for an investor to qualify as a "qualified client" under the Investment Advisers Act of 1940 ("Advisers Act"). Rule 205-3 under the Advisers Act precludes an SEC registered investment adviser from charging a client a performance-based fee (such as an incentive allocation or fee) unless the client is a "qualified client". For the avoidance of doubt, the investors in an investment fund (rather than the investment fund itself) are considered clients for purposes of this analysis. Currently, under Rule 205-3 a "qualified client" is defined as an investor that has (i) at least $750,000 in assets under management with the investment adviser or (ii) has a net worth at the time of investment of at least $1.5 million, including the value the investor's primary residence. In calculating the $750,000 assets under management threshold, an investor can include the investment that is currently being made with the investment adviser through an investment fund or separately managed account. Effective September 19, 2011, the assets under management threshold is being raised from $750,000 to $1 million and the net worth threshold is being raised from $1.5 million to $2 million. In addition, an investor can no longer include the value of his or her primary residence in calculating whether he or she meets the $2 million net worth threshold. Many states (such as California) follow Rule 205-3 and, therefore, even if your investment advisory firm is state registered (versus SEC registered) these changes may be applicable to your advisory business. Please note that, absent further guidance from the SEC, we currently believe that the new "qualified client" definition only applies to (i) new investors in your hedge funds and/or separately managed accounts and (ii) existing investors in your hedge funds that make an additional capital contribution. We do not currently believe that you need to recertify existing investors in your hedge funds or separately managed accounts that are not making additional capital contributions. Likewise, with respect to private equity funds, if an investor has already made a capital commitment to the fund, we do not believe that subsequent draw-downs of capital by the fund from such investor will require you to recertify such investor. However, as with hedge funds, any investor that is making a new capital commitment to the private equity fund would need to meet the new definition of "qualified client". We urge you to contact us as soon as possible in order to update the subscription documents for your investment funds, as well as any investment management agreements for separately managed accounts that you are contemplating in the future.

If you have any questions concerning this Alert or any related matters, please contact your attorney at Sadis & Goldberg or the author of this Alert, Lance Friedler at 212-573-8030 or lfriedler@sglawyers.com.

Cheryl Spratt