The SEC adjusted the definition of “qualified clients,” becoming effective on August 16, 2021, pursuant to the Dodd-Frank Act of 2010, requiring such an adjustment for inflation every five years. Investment Advisers Act of 1940 Section 205(a)(1) prohibits an RIA from charging a client a performance-based fee unless the client is a qualified client having a particular new work.
The current threshold to apply to a registered investment advisor is assets under management of at least $1 million, and it will increase to at least $1.1 million. The new limit for the client will raise the net worth test from $2.1 million to $2.2 million. meets the definition of a qualified client: an individual or entity, immediately after entering into an advisory contract with an RIA, with at least $1 million under management by the adviser or believed by the adviser to have a net worth of at least $2.1 million (together, in the case of a natural person, with assets held jointly with a spouse). The new thresholds raise the bar for satisfying both tests and are effective August 16, 2021.
Advisory firms should review their documents and procedures to ensure compliance with this new definition. However, the SEC stated that, for contracts that satisfied the prior definition, the client will still be considered “qualified” unless a new party is added. Seasoned securities counsel should be consulted to ensure full compliance.