Key Takeaways
- • The SEC raised the dollar thresholds for "qualified client" status under Advisers Act Rule 205-3, the rule that permits registered investment advisers to charge performance-based fees.
- • The assets-under-management test rises from $1,100,000 to $1,400,000, a 27% increase.
- • The net worth test rises from $2,200,000 to $2,700,000, a roughly 23% increase.
- • The new thresholds, set in Investment Advisers Act Release IA-6961, apply to advisory contracts entered into on or after June 29, 2026.
- • Family offices and individual clients should review their contract status and compliance procedures in light of the revised definitions, according to Squire Patton Boggs.
Summary
Squire Patton Boggs, in a Family Office Insights piece, reports that the U.S. Securities and Exchange Commission has raised the investment thresholds that define a "qualified client" under Rule 205-3 of the Investment Advisers Act of 1940. The rule is an exception to Section 205(a)(1) of the Act, which generally prohibits SEC-registered advisers from entering into contracts that provide for performance-based compensation, meaning fees tied to capital gains or appreciation of client funds. Many state registration regimes contain analogous prohibitions.
Under Rule 205-3, a registered adviser may charge performance-based fees to a client who meets either of two tests. The first is an assets-under-management test, under which the client must have at least a specified amount of assets under management with the adviser immediately after entering into the advisory contract. The second is a net worth test, under which the client must have a net worth exceeding a specified amount immediately before entering into the contract. The article notes that the analysis often overlaps with whether a client qualifies as a "qualified purchaser" under Section 2(a)(51) of the Investment Company Act of 1940, and that qualified purchasers are also qualified clients for Rule 205-3 purposes.
By statute, the SEC reviews and adjusts these dollar thresholds every five years. In Release IA-6961, the Commission set new levels: the assets-under-management test increases from $1,100,000 to $1,400,000, and the net worth test increases from $2,200,000 to $2,700,000. The new thresholds apply to advisory contracts entered into on or after June 29, 2026.
The article advises family offices and individuals entering into investment advisory contracts to understand the current definitional requirements as part of an effective and comprehensive compliance program.
Under Rule 205-3, a registered adviser may charge performance-based fees to a client who meets either of two tests. The first is an assets-under-management test, under which the client must have at least a specified amount of assets under management with the adviser immediately after entering into the advisory contract. The second is a net worth test, under which the client must have a net worth exceeding a specified amount immediately before entering into the contract. The article notes that the analysis often overlaps with whether a client qualifies as a "qualified purchaser" under Section 2(a)(51) of the Investment Company Act of 1940, and that qualified purchasers are also qualified clients for Rule 205-3 purposes.
By statute, the SEC reviews and adjusts these dollar thresholds every five years. In Release IA-6961, the Commission set new levels: the assets-under-management test increases from $1,100,000 to $1,400,000, and the net worth test increases from $2,200,000 to $2,700,000. The new thresholds apply to advisory contracts entered into on or after June 29, 2026.
The article advises family offices and individuals entering into investment advisory contracts to understand the current definitional requirements as part of an effective and comprehensive compliance program.
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