Effective Date A July amendment to the Investment Advisers Act will give investment advisers more flexibility when structuring performance fee arrangements with sophisticated clients. Additionally, managers of futures and derivatives accounts will particularly benefit, since they will now be liberated from the fee limitations of the old SEC rule. That rule prevented them from charging fees based on performance measured in less than a one year period in managing mixed portfolios of securities, futures and other derivatives. Existing performance fee arrangements that comply with the requirements of the current rule may continue, unless a client has failed to meet the new requirements under the amended rule with an arrangement prior to August 20 th . However, after that date, any new client added to an existing arrangement, and any new arrangement, will have to meet the requirements of the amended rule.
Specific disclosures have to be made to the client entering into the contract.
The amendment to the rule eliminates both the contract terms and the disclosure requirements. In addition, the new rule expands the types of clients who are eligible to participate in a performance fee arrangement with an investment adviser. The SEC chose to include certain knowledgeable employees of an investment adviser because the adviser is unlikely to be in a position to abuse that client. This provision applies to each tier of an organization. Therefore, the adviser must look through each tier of the entity to identify the ultimate equity owner and determine whether or not that owner is a qualified client.