Document ID: SEC-2021-0868-0001
Agency: sec
Document Type: Notice
Title: Order: Approving Adjustment for Inflation of the Dollar Amount Tests under the Investment Advisers Act
Posted Date: 2021-06-23T04:00Z

[Federal Register Volume 86, Number 118 (Wednesday, June 23, 2021)]
[Notices]
[Pages 32993-32994]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-13192]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 5756]

Order Approving Adjustment for Inflation of the Dollar Amount 
Tests in Rule 205-3 Under the Investment Advisers Act of 1940

June 17, 2021.

I. Background

    Section 205(a)(1) of the Investment Advisers Act of 1940 
(``Advisers Act'') generally prohibits an investment adviser from 
entering into, extending, renewing, or performing any investment 
advisory contract that provides for compensation to the adviser based 
on a share of capital gains on, or capital appreciation of, the funds 
of a client (also known as performance compensation or performance 
fees).\1\ Section 205(e) authorizes the Securities and Exchange 
Commission (``Commission'') to exempt any advisory contract from the 
performance fee prohibition if the contract is with any person that the 
Commission determines does not need the protections of the prohibition, 
on the basis of certain factors described in that section.\2\ Rule 205-
3 under the Advisers Act exempts an investment adviser from the 
prohibition against charging a client performance fees when the client 
is a

[[Page 32994]]

``qualified client.'' \3\ The rule allows an adviser to charge 
performance fees if the client has at least a certain dollar amount in 
assets under management (currently, $1,000,000) with the adviser 
immediately after entering into the advisory contract (``assets-under-
management test'') or if the adviser reasonably believes, immediately 
prior to entering into the contract, that the client has a net worth of 
more than a certain dollar amount (currently, $2,100,000) (``net worth 
test'').\4\
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    \1\ 15 U.S.C. 80b-5(a)(1).
    \2\ Under section 205(e), the Commission may determine that 
persons do not need the protections of section 205(a)(1) on the 
basis of such factors as ``financial sophistication, net worth, 
knowledge of and experience in financial matters, amount of assets 
under management, relationship with a registered investment adviser, 
and such other factors as the Commission determines are consistent 
with [section 205].'' 15 U.S.C. 80b-5(e).
    \3\ The exemption applies to the entrance into, performance, 
renewal, and extension of advisory contracts. See rule 205-3(a).
    \4\ See rule 205-3(d)(1)(i)-(ii); see also Order Approving 
Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 
under the Investment Advisers Act of 1940, Advisers Act Release No. 
4421 (June 14, 2016) [81 FR 39985 (June 20, 2016)] (``2016 Order''). 
Rule 205-3 includes other definitions of ``qualified client'' that 
do not reference specific dollar amount tests. See, e.g., rule 205-
3(d)(1)(ii)(B) and rule 205-3(d)(1)(iii).
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    The Dodd-Frank Wall Street Reform and Consumer Protection Act 
(``Dodd-Frank Act'') \5\ amended section 205(e) of the Advisers Act to 
provide that, by July 21, 2011 and every five years thereafter, the 
Commission shall, by order, adjust for the effects of inflation the 
dollar amount thresholds included in rules issued under section 205(e), 
rounded to the nearest multiple of $100,000.\6\ The Commission issued 
an order to revise the dollar amount thresholds of the assets-under-
management and net worth tests (to $1,000,000 and $2,000,000, 
respectively, as discussed above) on July 12, 2011.\7\ Rule 205-3 
codifies the threshold amounts revised by the 2011 Order and states 
that the Commission will issue an order on or about May 1, 2016, and 
approximately every five years thereafter, adjusting for inflation the 
dollar amount thresholds of the rule's assets-under-management and net 
worth tests based on the Personal Consumption Expenditures Chain-Type 
Price Index (``PCE Index,'' published by the United States Department 
of Commerce).\8\ On June 14, 2016, the Commission issued an order 
adjusting for inflation, as appropriate, the dollar amount thresholds 
of the assets-under-management test and the net worth test (to 
$1,000,000 and $2,100,000, respectively).\9\
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    \5\ Public Law 111-203, 124 Stat. 1376 (2010).
    \6\ See section 418 of the Dodd-Frank Act (requiring the 
Commission to issue an order every five years revising dollar amount 
tests in a rule that exempts a person or transaction from section 
205(a)(1) of the Advisers Act if the dollar amount test was a factor 
in the Commission's determination that the persons do not need the 
protections of that section).
    \7\ See Order Approving Adjustment for Inflation of the Dollar 
Amount Tests in Rule 205-3 under the Investment Advisers Act of 
1940, Advisers Act Release No. 3236 (July 12, 2011) [76 FR 41838 
(July 15, 2011)] (``2011 Order''). The 2011 Order was effective as 
of September 19, 2011. Id.
    \8\ See rule 205-3(e).
    \9\ See 2016 Order, supra footnote 4. The 2016 Order was 
effective as of August 15, 2016. Id. As a result of the 2016 Order, 
the dollar amount threshold of the net worth test was increased to 
$2,100,000, but the dollar amount threshold of the assets-under-
management test remained at $1,000,000. Id.
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II. Adjustment of Dollar Amount Thresholds

    On May 10, 2021, the Commission published a notice of intent to 
issue an order that would adjust for inflation the dollar amount 
thresholds of the assets-under-management test and the net worth 
test.\10\ The Commission stated that, based on calculations that take 
into account the effects of inflation by reference to historic and 
current levels of the PCE Index, the dollar amount of the assets-under-
management test would increase from $1,000,000 to $1,100,000, and the 
dollar amount of the net worth test would increase from $2,100,000 to 
$2,200,000.\11\ These dollar amounts--which are rounded to the nearest 
multiple of $100,000 as required by section 205(e) of the Advisers 
Act--would reflect inflation from 2016 to the end of 2020.
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    \10\ See Performance-Based Investment Advisory Fees, Advisers 
Act Release No. 5733 (May 10, 2021) [86 FR 26685 (May 17, 2021)]. 
Because the amount of the Commission's inflation adjustment 
calculations are larger than the rounding amount specified under 
rule 205-3, the dollar amount of both tests would be adjusted as a 
result of the Commission's inflation adjustment calculation effected 
pursuant to the rule.
    \11\ See id. at section II.A.
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    The Commission's notice established a deadline of June 4, 2021 for 
submission of requests for a hearing. No requests for a hearing have 
been received by the Commission.

III. Effective Date of the Order

    This Order is effective as of August 16, 2021. To the extent that 
contractual relationships are entered into prior to the Order's 
effective date, the dollar amount test adjustments in the Order would 
not generally apply retroactively to such contractual relationships, 
subject to the transition rules incorporated in rule 205-3.\12\
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    \12\ See rule 205-3(c)(1) (``If a registered investment adviser 
entered into a contract and satisfied the conditions of this 
[section] that were in effect when the contract was entered into, 
the adviser will be considered to satisfy the conditions of this 
[section]; Provided, however, that if a natural person or company 
who was not a party to the contract becomes a party (including an 
equity owner of a private investment company advised by the 
adviser), the conditions of this [section] in effect at that time 
will apply with regard to that person or company.''); see also 
Investment Adviser Performance Compensation, Advisers Act Release 
No. 3198 (May 10, 2011) [76 FR 27959 (May 13, 2011)], at section 
II.B.3. The 2011 Order and 2016 Order each applied to contractual 
relationships entered into on or after the effective date and did 
not apply retroactively to contractual relationships previously in 
existence. See Investment Adviser Performance Compensation, Advisers 
Act Release No. 3372 (Feb. 15, 2012) [77 FR 10358 (Feb. 22, 2012)], 
at section I, n.16; 2016 Order, supra footnote 4, at section III.
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IV. Conclusion

    Accordingly, pursuant to section 205(e) of the Advisers Act and 
section 418 of the Dodd-Frank Act,
    It is hereby ordered that, for purposes of rule 205-3(d)(1)(i) 
under the Advisers Act [17 CFR 275.205-3(d)(1)], a qualified client 
means a natural person who, or a company that, immediately after 
entering into the contract has at least $1,100,000 under the management 
of the investment adviser; and
    It is further ordered that, for purposes of rule 205-3(d)(1)(ii)(A) 
under the Advisers Act [17 CFR 275.205-3(d)(1)(ii)(A)], a qualified 
client means a natural person who, or a company that, the investment 
adviser entering into the contract (and any person acting on his 
behalf) reasonably believes, immediately prior to entering into the 
contract, has a net worth (together, in the case of a natural person, 
with assets held jointly with a spouse) of more than $2,200,000.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13192 Filed 6-22-21; 8:45 am]
BILLING CODE 8011-01-P