Pursuant to an order issued by the Securities and Exchange Commission (the “SEC”), the dollar amount thresholds in the definition of “qualified client” under Rule 205-3 under the Investment Advisers Act of 1940 (the “Advisers Act”) have increased effective September 19, 2011. This has impacted all fund managers and other investment advisers relying on Rule 205-3 under the Advisers Act.
Rule 205-3 under the Advisers Act generally prohibits a registered investment adviser from entering into any advisory contract that provides for a performance based fee unless the client is a “qualified client”. A qualified client under Rule 205-3 was defined as an investor who can satisfy one of the following (i) has at least $750,000 assets under management with the investment adviser or (ii) has a net worth of more than $1.5 million at the time the advisory contract is entered into.
On September 19, 2011, the threshold for assets under management was increased to $1 million; and the net worth threshold was increased to $2 million. It is also noted that the value of a person’s primary residence is to be excluded for purposes of determining whether a person satisfies the net worth test.
These changes will need to be incorporated in the investment fund’s offering documents and any investment management agreements, for separately managed accounts, to incorporate the adjusted “qualified client” definition.
