Source: https://www.privateequitylitigation.com/2016/05/sec-proposes-higher-net-worth-threshold-for-qualified-clients-under-the-advisers-act-2/
Timestamp: 2019-03-22 22:31:14
Document Index: 486007887

Matched Legal Cases: ['§205', '§418', '§205', '§2', '§3', '§3', '§205', '§3']

SEC Proposes Higher Net Worth Threshold for Qualified Clients under the Advisers Act | The Capital Commitment
Home > Compliance > SEC Proposes Higher Net Worth Threshold for Qualified Clients under the Advisers Act
On Wednesday, May 18, 2016, the U.S. Securities and Exchange Commission (SEC) proposed to increase the net worth threshold for qualified clients from $2 million to $2.1 million. This proposed adjustment is being made pursuant to a five-year indexing adjustment required by §205(e) of the Investment Advisers Act of 1940 (the Advisers Act), as amended by §418 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Investment advisers registered with the SEC are prohibited by §205(a)(1) of the Advisers Act from entering into, extending, or renewing any advisory contract which provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client (e.g. a performance-based fee like carried interest). An exemption from this prohibition is provided by Rule 205-3 under the Advisers Act for clients that meet the definition of a qualified client found in the rule.
Currently, Rule 205-3 provides that in order to be deemed a qualified client, a client must have either (i) at least $1 million of assets under the management of the investment adviser, or (ii) a net worth (together, in the case of a client which is a natural person, with assets held jointly with a spouse) which the investment adviser reasonably believes to be in excess of $2 million.[1] These amounts were last adjusted on September 19, 2011, when the assets under management threshold was increased from $750,000, and the net worth threshold was increased from $1.5 million. A qualified client also includes both a qualified purchaser as defined in §2(a)(51)(A) of the Investment Company Act of 1940 (the Investment Company Act) and an investment adviser’s knowledgeable employees (which generally include the investment adviser’s directors, executive officers and, subject to certain conditions, personnel engaged in investment activities).
Where a private investment fund is exempt from registration as an investment company under §3(c)(1) of the Investment Company Act, the fund sponsor must be mindful of Rule 205-3(b) under the Advisers Act which provides that each equity owner of any such fund will be considered a client for purposes of determining qualified client status. In contrast, this “look through” provision is not applicable to private investment funds that are exempt from investment company registration under §3(c)(7) of the Investment Company Act.
[1] While a natural person’s primary residence must not be included as an asset, indebtedness secured by the person’s primary residence, up to the estimated fair market value of the primary residence at the time the investment advisory contract is entered into, may be excluded as a liability (subject to limitations in the case of recently acquired debt). Additionally, indebtedness that is secured by the person’s primary residence in excess of the estimated fair market value of the residence must also be included as a liability.
Tags: §205(a)(1), §3(c)(1), Carried Interest, Dodd-Frank, Hedge Funds, IA-4388, Investment Adviser, Investment Advisers Act, Performance Fee, Private Equity, Private investment company, Qualified Client, Rule 205-3, SEC