May 16, 2011
The Dodd-Frank Act continues to reshape the world of investment management. The SEC recently released proposed amendments to Rule 205-3 of the Investment Adviser's Act of 1940. Rule 205-3 addresses the definition of "qualified client," which is an investor eligible to be charged performance fees by an investment adviser.
The proposed amendment carries out one of the mandates of the Dodd-Frank Act, which requires the SEC to adjust the "qualified client" net worth and assets-under-management criteria to account for inflation. As proposed, a qualified client must have either (a) at least $1 million under the management of the investment adviser (increased from $750,000) or (b) a net worth of more than $2 million (increased from $1.5 million). The Dodd-Frank Act requires the inflation adjustments to take effect on July 21, 2011, and every five years thereafter.
Beyond the Dodd-Frank requirements, the SEC also proposes to define "net worth" in this context to exclude the estimated value of an investor's primary residence and debt secured by the residence. The SEC's release explains that this will conform the definition of "net worth" to the definition of "net worth" recently adopted in the "accredited investor" context.
The new "qualified client" and "net worth" definitions will not apply retroactively. Investment management contracts that are valid prior to the enactment of the proposed rule may continue, notwithstanding that an investor might not meet the new "qualified client" criteria.
The SEC is accepting comments on this proposed rule until July 11, 2011. We will continue to monitor this and other changes to the investment adviser and investment company regulations.
