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The Securities and Exchange Commission is raising the net worth requirement for investors who are charged performance-based advisory fees, according to a revised rule issued by the agency Wednesday.
Under the revised SEC rule, registered investment advisors (RIAs) may charge clients performance fees if the client's net worth or assets under management meet certain dollar thresholds. Investors who meet the net worth or asset threshold are deemed to be "qualified clients," able to bear the risks associated with performance fee arrangements.
The rule now requires qualified clients to have at least $1 million of AUM with the advisor, up from $750,000, or a net worth of at least $2 million, up from $1 million.
These higher thresholds were put in place in July by an SEC order, as required by the 2010 Dodd-Frank Act.
In addition, the revised rule excludes the value of a client's primary residence and certain property-related debts from the net worth calculation.
The change was not required by the Dodd-Frank Act, but is consistent with changes the SEC approved in December to net worth calculations for determining who is an "accredited investor" eligible to invest in certain unregistered securities offerings.
A grandfather provision to the new performance rule permits RIAs to continue to charging clients performance fees if the clients were classified as “qualified clients” before the rule change.
The revised rule also requires the SEC to make inflation adjustments to the dollar thresholds used to determine whether an individual or company is a qualified client.
First proposed in May, the rule change takes effect 90 days after publication in the Federal Register, but investment advisors may rely on the grandfather provisions before then.
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