SEC Increases Thresholds to Charge Performance-Based Compensation

On July 12, 2011, the Securities and Exchange Commission (SEC) issued an order to increase the minimum amount of net worth or minimum amount under management that (i) a client of a registered investment adviser or (ii) an investor in a 3(c)(1) fund managed by a registered investment adviser must have in order to be charged performance-based compensation. The order sets the new qualification thresholds—pursuant to the SEC’s rule on performance-based compensation charged by registered investment advisers (Rule 205-3 under the Investment Advisers Act of 1940)—at either $2 million in net worth (increased from $1.5 million) or $1 million in assets under management with the relevant investment adviser (increased from $750,000), measured at the time the client enters into an advisory contract, or the investor invests in the 3(c)(1) fund.  Unlike the amendments to Rule 205-3 that the SEC proposed in May 2011, the order did not exclude the value of a client’s or an investor’s primary residence from the calculation of net worth nor did the order grandfather prior investors.  The SEC will likely adopt at least some of these changes in a later rule amendment prior to the effectiveness of the new thresholds.  The order will be effective as of September 19, 2011.

For a link to the order, please click here.

Contact Information

If you have any questions concerning this alert, please contact—

Mark H. Barth
mbarth@akingump.com
212.872.1065
New York

David M. Billings
dbillings@akingump.com
44.20.7012.9620
London

Jason M. Daniel
jdaniel@akingump.com
214.969.4209
Dallas

Robert M. Griffin
bgriffin@akingump.com
971.2.406.8500
Abu Dhabi

Prakash H. Mehta
pmehta@akingump.com 
212.872.7430
New York

Eliot D. Raffkind
eraffkind@akingump.com 
214.969.4667
Dallas

Fadi G. Samman
fsamman@akingump.com 
202.887.4317
Washington, D.C.

Simon Thomas
swthomas@akingump.com 
44.20.7012.9627
London

Stephen M. Vine
svine@akingump.com 
212.872.1030
New York

Ying Z. White
ywhite@akingump.com 
86.10.8567.2212
Beijing