Section 205 of the Investment Advisers Act of 1940 and Rule 205-3 thereunder prohibit an investment adviser registered with the Securities and Exchange Commission (the “SEC”) from entering into an investment advisory contract with a client (including investors in private investment companies) that provides for performance-based compensation, unless the client is a “qualified client.” A “qualified client” is, among other things, one that meets either a net worth threshold or an assets-under-management threshold, each as set by the SEC. On June 14, 2016, the SEC issued an order (the “Order”) approving an increase in the net worth threshold for “qualified clients” from $2 million to $2.1 million. The assets-under-management threshold will remain at $1 million.

The Order will be effective on August 15, 2016 (the “Effective Date”). Under the transition provisions of Rule 205-3, the increased net worth threshold will only apply to investment advisory contracts entered into on or after the Effective Date. It will not apply to (i) investment advisory contracts entered into prior to the Effective Date or (ii) additional investments by existing clients (including investors in private funds) who met the definition of “qualified client” when they initially contracted for investment advisory services with the investment adviser or invested in the private fund.

SEC-registered investment advisers should update their subscription agreements, additional subscription agreements and separately managed account agreements, and any other applicable documents with respect to private funds or accounts that require qualified client representations, to reflect the increased net worth threshold for new investors who invest on or after the Effective Date.

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If you have any questions regarding the matters covered in this memo, please contact any of the partners and counsel listed below or your primary attorney in Seward & Kissel’s Investment Management Group.