Key Takeaways
- • The SEC issued a final order on April 28, 2026, raising qualified client thresholds for performance-based fee arrangements, effective June 29, 2026, in a mandatory five-year inflation adjustment under Dodd-Frank requirements.
- • Net worth threshold increases to $2.7 million (excluding primary residence and related debt), up from $2.2 million; assets under management threshold rises to $1.4 million, up from $1.1 million.
- • Registered investment advisers managing hedge funds, private equity funds, private funds relying on Section 3(c)(1), registered investment companies (RICs), and business development companies (BDCs) must update subscription documents and investment management agreements by June 29, 2026.
- • Existing investors and clients are grandfathered under prior thresholds; only new investors and clients must satisfy the higher qualified client standards, limiting operational disruption for established fund structures.
- • Investment advisers must coordinate with operations, investor relations, and fund administrators to identify and amend outdated subscription documents and separately managed account agreements before the June 29 effective date.
Summary
On April 28, 2026, the Securities and Exchange Commission issued a final order adjusting the dollar amount thresholds that determine whether an investor qualifies as a "qualified client" under Rule 205-3 of the Investment Advisers Act of 1940. The adjustment represents a mandatory inflation-related increase required every five years under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC last updated these thresholds in June 2021, making the 2026 adjustment the second required update under the five-year cycle. The new thresholds become effective on June 29, 2026.
The revised qualified client standards establish two alternative tests. Investors must satisfy either a net worth requirement of $2.7 million, excluding the primary residence and related debt (increased from $2.2 million), or maintain assets under management with the registered investment adviser of $1.4 million (increased from $1.1 million). These thresholds determine eligibility for investors to be charged performance-based fees—compensation structures tied to capital gains or appreciation of client assets. Rule 205-3 permits registered investment advisers to charge such performance fees only to qualified clients, a restriction designed to protect less sophisticated investors from incentive-based fee arrangements.
The rule applies broadly across the alternative investment industry. Investors in private funds relying on Section 3(c)(1) of the Investment Company Act, registered investment companies (RICs), and business development companies (BDCs) must individually satisfy the qualified client test. Additionally, many states have incorporated the qualified client standard into their own exemptions from registration and fee restrictions for advisers managing private funds, expanding the rule's jurisdictional reach beyond SEC-regulated advisers.
Investment advisers managing these structures face specific compliance obligations. Subscription documents for 3(c)(1) funds and related private fund offerings must be amended to reflect the new thresholds, as must investment management agreements for separately managed accounts involving performance-based compensation. Advisers may include both old and new threshold amounts in documents until the June 29 effective date to permit acceptance of new investors under the prior standards during the transition period. Most critically, existing investors and fund participants are grandfathered under the previous thresholds—they may continue making additional investments without meeting the higher qualified client standards, a structural safeguard that limits operational disruption to mature fund platforms.
To implement these changes, advisers should establish coordination procedures involving investment operations, investor relations, fund administrators, and compliance teams to identify and remediate any subscription documents or agreements referencing outdated threshold amounts. These compliance steps should be incorporated into annual compliance reviews.
The revised qualified client standards establish two alternative tests. Investors must satisfy either a net worth requirement of $2.7 million, excluding the primary residence and related debt (increased from $2.2 million), or maintain assets under management with the registered investment adviser of $1.4 million (increased from $1.1 million). These thresholds determine eligibility for investors to be charged performance-based fees—compensation structures tied to capital gains or appreciation of client assets. Rule 205-3 permits registered investment advisers to charge such performance fees only to qualified clients, a restriction designed to protect less sophisticated investors from incentive-based fee arrangements.
The rule applies broadly across the alternative investment industry. Investors in private funds relying on Section 3(c)(1) of the Investment Company Act, registered investment companies (RICs), and business development companies (BDCs) must individually satisfy the qualified client test. Additionally, many states have incorporated the qualified client standard into their own exemptions from registration and fee restrictions for advisers managing private funds, expanding the rule's jurisdictional reach beyond SEC-regulated advisers.
Investment advisers managing these structures face specific compliance obligations. Subscription documents for 3(c)(1) funds and related private fund offerings must be amended to reflect the new thresholds, as must investment management agreements for separately managed accounts involving performance-based compensation. Advisers may include both old and new threshold amounts in documents until the June 29 effective date to permit acceptance of new investors under the prior standards during the transition period. Most critically, existing investors and fund participants are grandfathered under the previous thresholds—they may continue making additional investments without meeting the higher qualified client standards, a structural safeguard that limits operational disruption to mature fund platforms.
To implement these changes, advisers should establish coordination procedures involving investment operations, investor relations, fund administrators, and compliance teams to identify and remediate any subscription documents or agreements referencing outdated threshold amounts. These compliance steps should be incorporated into annual compliance reviews.
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