SEC Tightens Rules on Performance Fees Charged by Investment Advisers

On February 15, 2012, the SEC issued a revised version of Rule 205-3 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), which is the rule regarding performance fees that may be charged by registered investment advisers (the “Revised Rule”). The Revised Rule will require clients eligible to pay performance-based fees (“qualified clients”) to have at least $1 million of assets under management with the adviser, up from $750,000, or a net worth of at least $2 million, up from $1.5 million. These rule changes conform Rule 205-3’s dollar thresholds to the levels set by an SEC order in July 2011.

Similar to the recently revised definition of “accredited investor” found in Rule 501 of the Securities Act of 1933, which we discussed here, the Revised Rule excludes the value of the investor’s home and certain related debt from the net worth calculation. In addition, the Revised Rule also adds certain grandfathering provisions permitting advisers to continue to charge certain clients performance fees if such clients were considered “qualified clients” and had the performance-based fee arrangement with the adviser prior to the establishment of the new dollar thresholds described above. In addition, newly registering investment advisers are permitted to continue charging performance fees to those clients they were already charging performance fees prior to registration.

We encourage registered investment advisers that charge performance fees to their clients to review and, as necessary, update their client agreements and/or fund offering documents to help ensure compliance with the Revised Rule.

The SEC’s release regarding the Revised Rule, is available here.

Latest Thinking

View more Insights
Insights Center
close
Loading...
Knowledge assets are defined in the study as confidential information critical to the development, performance and marketing of a company’s core business, other than personal information that would trigger notice requirements under law. For example,
The new study shows dramatic increases in threats and awareness of threats to these “crown jewels,” as well as dramatic improvements in addressing those threats by the highest performing organizations. Awareness of the risk to knowledge assets increased as more respondents acknowledged that their