Rule 205-3 under the Investment Advisers Act of 1940 permits investment advisers to charge performance- based compensation (including performance and incentive fees by private funds) only to “qualified clients.” On June 14, 2016, the Securities and Exchange Commission amended Rule 205-3 by increasing the net worth test in the rule from $2 million to $2.1 million effective August 15, 2016.
Currently, a “qualified client” is an advisory client (or an investor in a private fund) that at the time of the client’s contract or fund investment:
- has at least $1 million under management with the investment adviser; or
- has a net worth (excluding any primary residence) of more than $2 million.
Advisory clients and fund investors that satisfied the conditions of Rule 205-3 in effect when entering into the advisory contract or making the fund investment will be deemed to satisfy the amended Rule 205-3. However, the amended net worth test under Rule 205-3 must be met at the time of any additions to an existing contract or fund investment.
We are happy to assist you with updating your offering documents and addressing any questions related to existing advisory contracts.