On March 27, the SEC released a Notice of Intent that will ultimately increase the net worth and asset under management thresholds which allow investment advisers to charge performance fees to their clients and underlying investors who meet the definition of a “qualified client”.
The Dodd-Frank Act statutorily requires the SEC to adjust these thresholds every five years in response to inflation. Per this notice, the SEC intends to increase these thresholds as follows:
- Assets-Under-Management Test (i.e., the assets under management that a client has with a particular investment adviser): Increase from $1,100,000 to $1,400,000
- Net Worth Test (i.e., net worth of a client): Increase from $2,200,000 to $2,700,000.
The SEC expects to issue its order on or about May 1, 2026. This order would then become effective 60 days later on or about July 1, 2026, which is the date these new thresholds would become effective.
We note that to the extent an adviser enters into a contractual relationship with a client prior to July 1; these increased thresholds would not generally apply retroactively to such contractual relationships.
Takeaways:
Private fund managers to 3(c)(1) private funds that charge performance fees may be required to amend their offering documents and subscription agreements to reflect these new thresholds. Similarly, investment advisers to separately managed accounts may need to update their investment management agreements to include these new thresholds to charge performance fees to these SMAs.