SEC Approves Increased Net Worth Threshold for “Qualified Clients”

June 22, 2016

Section 205 of the Investment Advisers Act of 1940 and Rule 205-3 thereunder prohibit an investment adviser registered with the Securities and Exchange Commission (the “SEC”) from entering into an investment advisory contract with a client that provides for performance-based compensation, unless the client is a “qualified client.” Currently, a “qualified client” is, among other things, one that has at least $1 million under management with the adviser or a net worth of more than $2 million (excluding the value of the client’s primary residence). Section 418 of the Dodd-Frank Wall Street Reform and Consumer Protection Act required that, beginning in 2011, the SEC adjust these dollar amount thresholds for inflation every five years, rounding to the nearest $100,000. In accordance with this requirement, on June 14, 2016, the SEC issued an order (the “Order”) approving an increase in the net worth threshold for “qualified clients” from $2 million to $2.1 million. The assets-under-management threshold will remain at $1 million.

The Order will be effective on August 15, 2016. Investment advisory contracts entered into prior to the Order’s effective date will not be affected by the Order.


If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Investment Management Group.