Increases to the Qualified Client “Assets-Under-Management” and “Net Worth” Test Amounts

On June 17, 2021, the U.S. Securities and Exchange Commission (“SEC”) issued an order (“Order”) updating the definition of qualified client and the “assets-under-management” and “net worth” tests so as to take into account the effects of inflation since the dollar amounts were last reviewed by the SEC in 2016. The adjustments are described below:

Adjustment of the Assets-Under-Management Test

Effective Aug. 16, 2021, the dollar amount of the assets-under-management test is $1.1 million, an increase from the $1,000,000 allowed previously.

Adjustment of the Net Worth Test

Effective Aug. 16, 2021, the dollar amount of the net worth test is $2.2 million, an increase from the $2,100,000 allowed previously.

The Order will become effective as of Aug. 16, 2021. Accordingly, for those RIAs entering into performance-based compensation arrangements with clients on or after Aug. 16, 2021, any such prospective client will need to have assets under management of at least $1.1 million, have a net worth of at least $2.2 million, or otherwise satisfy the definition of qualified client, or another exemption from the performance fee prohibition will need to be satisfied. 

The Order notes that the dollar amount adjustment will not apply retroactively, subject to the Rule’s transition rules, including Rule 205-3(c)(1), which deems a RIA to have satisfied the conditions of the Rule if such RIA satisfied the conditions in effect at the time the relevant advisory contract was entered into. Accordingly, existing clients of an adviser that were qualified clients at the time they originally entered into an investment advisory contract need not meet the new threshold amount.

If you have any questions about this Alert, or any other regulatory matters, do not hesitate to reach out to Daniel Viola (Partner – Head of the Regulatory Group) at 212.573.8038 or via email at dviola@sadis.com.