The Securities and Exchange Commission issued an order today that raises two thresholds as of September 19 that determine whether registered investment advisors can charge performance-based fees.
Under the order, a person or company will need to have at least $1 million in assets under management with the investment advisor or have a net worth of $2 million at the time a contract is signed to be charged performance-based fees, which allow an RIA to charge a percentage of capital gains or capital appreciation earned by a client's funds. Such fees often are charged by hedge fund managers.
The SEC's action will revise the definition of a "qualified client" under rule 205-3 in the Investment Advisers Act of 1940. The rule now requires that a client must have at least $750,000 under management or a net worth of more than $1.5 million if they are to be charged performance-based fees. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that by July 21 and every five years thereafter, the SEC adjust for inflation these dollar-amount tests.The SEC came up with the new thresholds based on calculations of inflation since 1998 when the dollar amount thresholds were last revised.