Inflation Accounted for As SEC Revamps Advisory Fees Under Dodd-Frank

Jack Humphrey, Regulatory journalist
May 12, 2011 /

The Securities and Exchange Commission (SEC) has bared plans today to raise certain dollar thresholds in advisory fees under the Dodd-Frank Act that investment advisers need to meet before charging the said fees on their clients.

At present, investment advisers can charge their clients advisory fees under two circumstances provided for by Rule 205-3 under the Investment Advisers Act of 1940 that allows investment advisers to charge performance-based fees to “qualified clients”.

One, the client must have at least $750,000 under management with the adviser. Two, the investment adviser can charge advisory fees on the client under the belief that the client has a net worth of more than $1.5 million.

Under section 418 of the Dodd-Frank Act, the SEC is required to issue an order adjusting these dollar amount thresholds by July 21, 2011, and every five years thereafter, while taking into account the inflation.

Subsequently, the SEC seeks to increase the dollar amount thresholds in its proposal to $1 million for assets under management and $2 million for net worth.

Additionally, the SEC seeks to amend Rule 205-3 to draw up a method to calculate future inflation adjustments of the dollar amount tests and remove the value of a person’s primary residence from the determination of whether a person meets the net worth standard.

The transition provisions of the rule will also be modified to account for the advisory fee arrangements that were permissible at the time the advisory contract between a client and investment adviser begins.

The SEC expects to hear requests on its notice for an order by June 20.

The SEC allows the public to give their comments on the plan no later than July 11, 2011 in compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Meanwhile, the Financial Services Authority (FSA) has admitted it does not have a benchmark yet for advisory fees when the retail distribution review (RDR) will be implemented.

According to Peter Smith, FSA’s head of investment policy, despite the lack of standards by which to determine whether an advisory fee is fair or not, the financial regulator will still look into the fairness of fees after implementation of the RDR.


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