Performance-Based Investment Advisory Fees: Inflation Adjustment to Qualified Client Thresholds

The U.S. Securities and Exchange Commission (SEC) is proposing an order to adjust, for inflation, the dollar thresholds that define a 'qualified client' under Rule 205-3 of the Investment Advisers Act of 1940. Currently, investment advisers are generally prohibited from charging performance-based fees unless their clients meet specific financial thresholds. These thresholds are periodically adjusted by the SEC to account for inflation. The proposed order would increase the minimum net worth threshold required for a client to qualify as a 'qualified client,' allowing their adviser to charge performance-based (e.g., carried interest or profit-sharing) fee arrangements. Similarly, the minimum assets-under-management (AUM) threshold — the dollar amount a client must have invested with the adviser — would also be raised. The adjustment is intended to ensure that the qualified client standard continues to reflect current economic conditions and that only sufficiently wealthy investors, who are presumed capable of evaluating and bearing the risks of performance-based fee structures, are subject to such arrangements. The SEC is required by statute to perform these inflation adjustments every five years. This is a proposed rule stage, meaning the public may have an opportunity to comment before the final order is issued. Once finalized, investment advisers will need to reassess their existing and prospective client bases to ensure compliance with the updated thresholds.

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