Effective August 16, 2021, the Securities and Exchange Commission will apply new threshold amounts with respect to the definition of “qualified clients,” raising the starting dollar amounts of the assets-under-management and net worth tests under Rule 205-3 of the Investment Advisers Act of 1940 (“Advisers Act”).

Rule 205-3 allows an investment adviser to charge a qualified client performance fees.  A qualified client meets one of the two following tests:

  • Assets-under-management test:  A client that has at least a certain dollar amount in assets under management (currently, $1,000,000) immediately after entering into the advisory contract; or
  • Net-worth test:  A client that the adviser reasonably believes, immediately prior to entering into the contract, has a net worth of more than a certain dollar amount (currently, $2,100,000).

Every five years, the SEC is ordered, under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), to adjust the threshold amount of the tests for inflation, increasing the dollar amount to the nearest multiple of $100,000.   As it started to do in July 21, 2011, the SEC began to adjust the thresholds for inflation.

Now, another five years have elapsed since the most recent assessment, and the SEC has released its Order adjusting the thresholds again, bringing the assets-under-management test threshold to $1,100,000 and the net worth test to $2,200,000 (reflecting inflation adjustments from 2016 to the end of 2020).