Inflation Adjustment Act by SEC Raises Performance Fee Rule Dollar Limit

Jack Humphrey, Regulatory journalist
July 12, 2011 /

The Securities and Exchange Commission (SEC) has issued an order raising two of the thresholds that determine whether an investment adviser can charge its clients performance fees.

The order carries out a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act in adjusting for the inflation.

The SEC published a notice of its intent to issue the order on May 10, 2011. 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.

Rule 205-3 under the Investment Advisers Act authorizes an investment adviser to levy client performance fees if the client meets certain criteria, including two tests that have dollar amount thresholds.

Under SEC’s order, an investment adviser will be able to charge performance fees if the client has at least $1 million under the management of the adviser, or if the client has a net worth of more than $2 million. Clients must meet either of these tests at the time of entering into the advisory contract.

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 Dodd-Frank Act requires the SEC to issue an order to adjust for inflation these dollar amount thresholds by July 21, 2011 and every five years thereafter.

The order will be effective on September 19, 2011, which will be approximately 60 days after its publication in the Federal Register.


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