SEC Revises Dollar Amount Thresholds Determining Whether to An Advisory Client Would Have to Pay Performance Fees

The Securities and Exchange Commission is adopting changes to the dollar amount thresholds, under the 1940 Investment Advisers Act, that are used to determine whether an advisory clients can be made to pay a performance fee. Per the current provision, an adviser has to be managing at least $750k of the client’s money or the adviser must have reasonable grounds for believing that the client’s net worth is over $1M. However, per the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 418, the SEC has directed that inflation adjustments to the dollar amount tests would be made every five years.

Last year the SEC put out an order modifying the “qualified client” assets management test from $750K to $1M. The test for net worth was changed from $1M to $2M. On February 15, 2012, the SEC said it was adopting these amendments to the Advisers Act’s Rule 205-3.

Per the amended rule, an individual’s primary residence worth and specific debt related to property would not be included when determining the net worth calculation. The amended rule comes with a grandfather provision that lets advisers keep charging clients who were qualified clients prior to the rule change performance fees. The amendments will be in effect 90 days after they are published in the Federal Register.

In other SEC-related investment adviser news, certain affiliated advisers may be able to take advantage of a no-action decision letting multiple advisers use one registration form when preparing Commission registration documents. The registration requirement comes in the wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which modified exemption provisions of the Investment Advisers Act of 1940. As a result, hundreds of investment advisers must register with the SEC for the first time because they are no longer exempt.

These advisers have until March 30 to register with the SEC. However, seeing as processing takes about 45 days, February 14 is the better day to register by.

In January, the American Bar Association’s Business Law Section sent a letter asking the SEC for interpretive direction regarding whether an adviser belonging to a group of related advisers in a controlled relationship dealing with one advisory business can fulfill their registration requirements with just one registration. The letter noted that certain business models have a single structure made up of many entities that now have to register with the SEC. The structures were established so that certain liability and tax matters were addressed or so that portfolio managers could give advice to different funds according to different investment strategies and goals.

SEC Division of Investment Management Branch Chief Tram N. Nguyen, in a no-action letter, acknowledged that while Form ADV, which is for registering, is supposed to be used by just one adviser, the Commission was aware that for certain advisers, using a single form might be appropriate.

Advisers wanting to avail of the no-action later have to satisfy certain criteria. For example, each adviser who is part of a joint registration submission with the SEC has to operate under ethical code and one set of procedures and policies. They also must advise just private funds and separate qualified account clients.

Shepherd Smith Edwards and Kantas, LTD, LLP represents individual and institutional investors. Contact our securities fraud lawyers today.

SEC Tightens Rules on Advisory Performance Fee Charges, SEC, February 15, 2012

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