The Securities and Exchange Commission has issued an order raising the threshold for determining whether an investment adviser can charge performance fees to clients. The increase is because of inflation. It also executes a Dodd-Frank Wall Street Reform and Consumer Protection Act requirement.
Under the Investment Adviser Act’s Rule 205-3, investment advisers are allowed to charge performance fees if the client meets certain criteria. Two tests with dollar amount threshold are among these requirements.
Per the SEC order, an investment adviser can charge performance fees if it is managing at least $1 million for the client, or if the latter’s net worth is over $2 million. Either test has to have been satisfied at the time that the advisory contract is entered. Prior to this order, since 1998 the thresholds have been $750,000 and $1.5 million, respectively.
Under the Dodd-Frank Act, the Commission was required to set forth an order to take into account inflation by July 21, 2011. The new order will go into effect on September 19, 2011
The SEC has proposed amendments to Rule 205-3, including:
• Using the PCE Index as the inflation index to calculate the inflation adjustment rates to this rule, which would be updated every five years.
• Excluding the value of that person’s main residence and debt that the property securities when determining if someone is a “qualified client”.
• Letting an investment adviser and its clients keep existing performance fee arrangements that were set up when they entered into the advisory contract.
Read the SEC Rule (PDF)
More Blog Posts:
SEC to Up Dollar Thresholds for When an Investment Adviser Can Charge Investors Performance Fees, Stockbroker Fraud Blog, May 24, 2011
Investments Advisers Told to Look at Recent SEC Enforcement Actions When Preparing for Exams, Stockbroker Fraud Blog, April 20, 2011
No Need for New SRO Overseeing Investment Advisers, Says NASAA Official to Congress, Stockbroker Fraud Blog, April 10, 2011