Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Tuesday, May 10, 2011

SEC Proposes Changes to Dollar Thresholds for Investment Adviser Performance Compensation

The SEC provided public notice of its plan to raise certain dollar thresholds that would need to be met before investment advisers can charge their clients performance fees. The SEC seeks public comment on the plan, which would satisfy a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Currently, Rule 205-3 under the Investment Advisers Act allows an adviser to charge its clients performance fees in certain circumstances. Two of the circumstances are:

  • The client has at least $750,000 under management with the adviser.
  • The adviser reasonably believes the client has a net worth of more than $1.5 million.

Section 418 of the Dodd-Frank Act requires the SEC to issue an order to adjust for inflation these dollar amount thresholds by July 21, 2011, and every five years thereafter. As a result, the SEC issued today’s notice that it intends to issue an order to revise the dollar amount tests to $1 million for assets under management and $2 million for net worth.

The Commission also proposed related amendments to Rule 205-3 that would:

  • Provide the method for calculating future inflation adjustments of the dollar amount tests.
  • Exclude the value of a person’s primary residence from the determination of whether a person meets the net worth standard.
  • Modify the transition provisions of the rule to take into account performance fee arrangements that were permissible at the time the adviser and client entered into their advisory contract.

The SEC also is seeking public comment on these proposed related rule amendments.

Hearing requests on the SEC’s notice for an order should be received by June 20, 2011, and comments on the SEC’s proposed rule amendments should be received by July 11, 2011.

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