Pursuant to section 205 of the Investment Advisers Act of 1940 (the “Advisers Act”), an investment adviser registered with the Securities and Exchange Commission (the “SEC”) is generally prohibited from entering into an investment advisory contract with a client that provides for performance-based compensation, unless the client is a “qualified client.” Currently, a “qualified client” is, among other things, one that has at least $1 million under management with the adviser or a net worth of more than $2.1 million (excluding the value of the client’s primary residence).

Section 418 of the Dodd-Frank Wall Street Reform and Consumer Protection Act required that, beginning in 2011, the SEC adjust these dollar amount thresholds for inflation every five years, rounding to the nearest $100,000. In accordance with this requirement, on June 17, 2021, the SEC issued an order (the “Order”) that would raise the assets-under-management threshold from $1 million to $1.1 million and would raise the net worth threshold necessary to be a “qualified client” from $2.1 million to $2.2 million. The Order is effective as of August 16, 2021. Investment advisory contracts entered into prior to the Order’s effective date would generally not be affected by the Order.

If you have any questions concerning the proposed change to the “qualified client” thresholds, please contact an attorney in the Investment Management Group at Seward & Kissel.