SEC Raises Qualified Client Net Worth Threshold

On June 14, 2016, the U.S. Securities and Exchange Commission (the "SEC") issued an order approving an increase to the net worth threshold for "qualified clients" under SEC Rule 205-3 under the Investment Advisers Act of 1940 (the "Advisers Act") from $2 million to 2.1 million. The order was issued pursuant to Section 205(e) of the Advisers Act and Section 418 of the Dodd-Frank Act which requires the SEC to issue an order every five (5) years to adjust for inflation. The effective date of the increase of the net worth threshold is August 15, 2016.In general, SEC registered investment advisers are prohibited by Section 205(a)(1) of the Advisers Act from charging performance based compensation. An exemption from this prohibition is provided by SEC Rule 205-3 under the Advisers Act for clients/investors that currently meet the definition of a "qualified client" as follows:

(i) the client/investor has at least $1 million of assets under management with the investment adviser, or (ii) a net worth (together, in the case of a natural person, with assets held jointly with a spouse) which the investment adviser reasonably believes to be in excess of $2 million. Note that a person's primary residence must not be included as an asset in this net worth calculation.

The assets under management test (set forth in subsection (i) above) is not being adjusted at this time. Moreover, a qualified client also includes both a "Qualified Purchaser" as defined in Section 2(a)(51)(A) of the Investment Company Act of 1940 and an investment adviser's "knowledgeable employees."

We suggest investment advisers to consult with counsel and update their current investment advisory agreements and/or fund offering documents to confirm to the new threshold.

To read the Order, please click on the link below: https://www.sec.gov/rules/other/2016/ia-4421.pdf

If you have any questions about the Alert, please contact Daniel G. Viola at 212.573.8038 or dviola@sglawyers.com.

Cheryl Spratt