Performance Fees Increased Thresholds

Main Contributor: Zachary Fenno, CSCP, Compliance Manager

Qualified Client Threshold

The SEC scrutinizes performance fees heavily, so it is important to stay abreast of new regulations surrounding when advisors can charge performance fees. The Advisor’s Act prohibits registered advisors from charging a performance-based fee unless the client meets the definition of a “Qualified Client.”

Originally a Qualified Client had either $1,000,000 in assets under management with the advisor or $2,100,000 in net worth.

Effective August 16, 2021, the SEC updated those thresholds to $1,100,000 in assets under management or a net worth of at least $2,200,000. An increase of $100,000 with both requirements.

These requirements apply to managed accounts and investors in private funds.

NOTE: This new definition only applies to new clients at the time of the order. This does not retroactively apply to clients who have already met the previous threshold(s).

What Do You Need to Do Now?

If you only manage separate accounts, you will need to amend your policies and procedures to match the new required limits.

If you are a 3(c)(1) fund, you will want to update your policies and procedures and your offering documents to meet the new required limits.

Conclusion

While these limits do not drastically change what is required, it is important to ensure all of your documents that pertain to performance fees are updated to match these new guidelines. It is also important to note that this threshold will change approximately every five years, based upon inflation.