SEC Raises Rule Requirements for Advisory Performance Fees

RIA NEWSLETTER EXCERPT – March 2012 –A recent AdvisorOne article discussed the Securities and Exchange Commission’s announcement that it has decided to “tighten its rule on investment advisory performance fees to raise the net worth requirement for investors who pay performance fees by excluding the value of the investor’s home from the net worth calculation.”

Under the current SEC rule, RIAs can charge clients performance fees as long as the client’s net worth or assets under management by the adviser meet the necessary dollar amount thresholds. Those investors who meet the aforementioned requirements are termed “qualified clients,” and can take the responsibility of the risk that accompanies “performance fee arrangements.”

Within the redaction, the SEC requires that all “qualified clients” have at least $1 million of assets under management with the adviser, or a net worth of at least $2 million. Both of these increases in monetary value were required under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, and will exclude the value of a client’s primary residence. This recalculation is consistent with the SEC’s December decision to change how they calculated net worth for deciding who are “accredited investors” capable of investing in unregistered security offerings.

The SEC “clearly intended to sync up the method of calculating thresholds for qualified clients with the recently adopted changes to the method of calculating the thresholds for accredited investors,” says Karen Barr, general counsel for Investment Adviser Association in Washington.

Along with the above provisions, this revised rule states that every five years, the SEC will “issue an order making inflation adjustments to the dollar thresholds used to determine whether an individual or company is a qualified client, as required by the Dodd-Frank Act.”

Click here to read the complete AdvisorOne article: “SEC Tightens Rule on Advisory Performance Fees.”

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