Overview
The US Securities and Exchange Commission (SEC) issued its periodic inflation adjustment to the “qualified client” dollar amount tests under Rule 205-3, with the new thresholds taking effect on June 29, 2026. The assets-under-management test will increase to $1.4 million (from $1.1 million) while the net worth test will increase to more than $2.7 million (from $2.2 million). These revised thresholds are particularly relevant for funds offered pursuant to Section 3(c)(1) of the Investment Company Act of 1940 and for separately managed accounts serving high-net-worth individuals.
In Depth
Background
Section 205(a)(1) of the Investment Advisers Act of 1940 generally prohibits an investment adviser from entering into or performing an advisory contract that provides compensation based on a share of capital gains or capital appreciation (i.e., performance compensation/fees).
In scope: For many advisers, clients subject to the qualified client requirement will include private funds offered under Section 3(c)(1) – the exemption for funds with 100 or fewer beneficial owners – and separately managed accounts for high-net-worth individuals.
Out of scope: Private funds offered under Section 3(c)(7) are excluded from the qualified client requirement and the requirement does not apply to non-US clients or investors.
The qualified client requirement is satisfied where:
- The investor or client has $1.4 million in assets managed by the adviser immediately after investing in the fund or entering into the advisory agreement;
- The adviser reasonably believes that the investor or client has a net worth greater than $2.7 million at the time of investing in the fund or entering into the advisory agreement (including assets held jointly with a spouse but excluding the value of the primary residence and related debt); or
- The investor or client is a qualified purchaser or a knowledgeable employee.
Timing and immediate next steps
The new thresholds do not apply to investment advisory agreements or subscriptions to funds made before June 29, 2026. New subscriptions, new investors, and certain transfers occurring on or after June 29, 2026, will be evaluated under the new thresholds.
- Advisers to Section 3(c)(1) funds should update subscription materials and investor questionnaires to reflect the new dollar thresholds.
- Advisers to separately managed accounts with high-net-worth individuals should update their advisory agreements and client questionnaires to reflect the new dollar thresholds.
- Advisers permitting transfers of fund interests should update their transfer documentation to reflect the new dollar thresholds as applicable.
- All advisers should review policy, procedure, and any other documents reflecting the qualified client thresholds and update them accordingly.
If you have questions about how the revised “qualified client” thresholds may affect your business, please contact McDermott’s Investment Management Group.