Amendments to "Qualified Client" Dollar Thresholds

Amendments to "Qualified Client" Dollar Thresholds

Every five years, as provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act amended section 205(e) of the Investment Advisers Act of 1940 (“Advisers Act”), the U.S. Securities and Exchange Commissions (“SEC”) adjusts the dollar amount thresholds for a Qualified Client to account for inflation, to the nearest multiple of $100,000. This five-year redefinition will increase the standards for a qualified client as of August 16, 2021. 

Rule 205-3 of the Advisers Act permits investment advisers to receive performance-based compensation only when the client is a qualified client. As of August 16, 2021, a qualified client will be a client that:

1. Has at least $1.1 million in assets under management with the investment adviser immediately after entering into the advisory contract; or

2. Has a net worth (together, in the case of a client that is a natural person, with assets held jointly with a spouse) that the investment adviser reasonably believes to be in excess of $2.2 million immediately prior to entering into the advisory contract”

A qualified client also includes a “qualified purchaser” as defined in section 2(a)(51)(A) of the Investment Company Act of 1940 (“Company Act”), as amended, and an investment adviser’s “knowledgeable employees.”

The increased thresholds will affect individually managed accounts and private funds that rely on the exception to the definition of an investment company provided in section 3(c)(1) of the Company Act, which is required to “look through” to each investor of such a fund to determine such investor’s qualified client status. 

Clients that enter into advisory elements in reliance on the net worth test prior to the effective date will be grandfathered in under the prior net worth threshold. However, private fund advisers to 3(c)(1) funds should update their current offering documents to conform to the new qualified client threshold. The updated net worth threshold should be reflected in prospective investor net worth representations in subscription agreements for any section 3(c)(1) funds with closings on or after the effective date and representations in any documents used in effectuating secondary transfers of ownership interests in existing section 3(c)(1) funds following the effective date.

Click here for additional information regarding the order approving adjustment for inflation of the dollar amount tests in Rule 205-3 under the Advisers Act.

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