Key Takeaways
- • The SEC issued a notice of intent on March 27, 2026, to adjust inflation-indexed thresholds for "qualified client" status under Rule 205-3 of the Investment Advisers Act, permitting registered investment advisers to charge performance-based fees only to clients meeting heightened wealth or asset criteria.
- • Qualified client thresholds will increase to a minimum net worth of $2.7 million (excluding primary residence and certain related debt) or a minimum of $1.4 million in assets under management with the adviser—representing a material increase from prior levels.
- • Investment advisers managing private funds relying on Section 3(c)(1) of the Investment Company Act, registered investment companies (RICs), and business development companies (BDCs) must update subscription documents and investment management agreements by the effective date of the final order to reflect new thresholds.
- • The adjustment affects each investor in 3(c)(1) funds, RICs, and BDCs, as each investor must independently satisfy the qualified client test, expanding compliance obligations across fund structures.
Summary
The Securities and Exchange Commission announced on March 27, 2026, its intent to issue a final order adjusting dollar-amount thresholds defining "qualified clients" under Rule 205-3 of the Investment Advisers Act of 1940. The rule establishes eligibility criteria for registered investment advisers seeking to charge performance-based compensation structures. Under the proposed inflation adjustment, qualified client status will require either a minimum net worth of $2.7 million—calculated without including primary residence value or certain related debt obligations—or a minimum of $1.4 million in assets under management with the specific investment adviser.
This threshold adjustment carries significant operational and compliance implications for the investment management industry. Advisers offering performance-based fee arrangements to private funds relying on Section 3(c)(1) of the Investment Company Act, as well as those serving registered investment companies and business development companies, must treat each underlying investor as an individual client for purposes of the qualified client determination. Consequently, all subscription documents for 3(c)(1) funds and investment management agreements for certain separately managed accounts will require amendment to reflect the new thresholds prior to the order's effective date.
The inflation adjustment mechanism embedded in Rule 205-3 ensures that qualified client definitions remain calibrated to economic conditions and purchasing power over time. By establishing these higher thresholds, the SEC reinforces the regulatory framework restricting performance-based fee arrangements to investors with substantial financial sophistication and resources, a protective measure designed to ensure that only clients capable of evaluating complex compensation structures gain access to such arrangements. Advisers and their counsel should prioritize updating disclosure documents and operational compliance procedures to align with the new requirements upon finalization of the SEC's order.
This threshold adjustment carries significant operational and compliance implications for the investment management industry. Advisers offering performance-based fee arrangements to private funds relying on Section 3(c)(1) of the Investment Company Act, as well as those serving registered investment companies and business development companies, must treat each underlying investor as an individual client for purposes of the qualified client determination. Consequently, all subscription documents for 3(c)(1) funds and investment management agreements for certain separately managed accounts will require amendment to reflect the new thresholds prior to the order's effective date.
The inflation adjustment mechanism embedded in Rule 205-3 ensures that qualified client definitions remain calibrated to economic conditions and purchasing power over time. By establishing these higher thresholds, the SEC reinforces the regulatory framework restricting performance-based fee arrangements to investors with substantial financial sophistication and resources, a protective measure designed to ensure that only clients capable of evaluating complex compensation structures gain access to such arrangements. Advisers and their counsel should prioritize updating disclosure documents and operational compliance procedures to align with the new requirements upon finalization of the SEC's order.
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