At a Glance
- Advisers to private funds should update subscription agreements and other offering documents to reflect the changed thresholds.
- Advisers to separately managed accounts should update their advisory contracts to reflect the changed thresholds.
- All advisers should incorporate the changed thresholds into their compliance procedures.
On April 28, 2026, the Securities and Exchange Commission (SEC) issued an Order (Release No. IA-6961) increasing the "qualified client" dollar thresholds under Rule 205-3 of the Investment Advisers Act of 1940, as amended (Advisers Act). These thresholds determine to which clients an SEC-registered investment adviser may charge performance-based fees (i.e., fees based on capital gains or capital appreciation). The new dollar thresholds are effective June 29, 2026.
The Dodd-Frank Wall Street Reform and Consumer Protection Act amended Section 205(e) of the Advisers Act to require the SEC to adjust the qualified client dollar-amount thresholds for the effects of inflation every five years, rounded to the nearest multiple of $100,000. The adjustments are calculated by reference to the Personal Consumption Expenditures Chain-Type Price Index published by the US Department of Commerce. The commission previously issued inflation-adjustment orders in 2011, 2016, and 2021.
Threshold Changes
Assets-under-Management (AUM) Test
- Increases from $1,100,000 to $1,400,000.
- An adviser may only charge performance fees if the client has at least $1,400,000 under management with the adviser immediately after entering into the advisory contract or private fund subscription agreement.
Net Worth Test
- Increases from $2,200,000 to $2,700,000.
- An adviser may only charge performance fees if the adviser reasonably believes, immediately prior to entering into the contract or subscription agreement, that the client has a net worth exceeding $2,700,000 (including assets held jointly with a spouse but excluding the value of the primary residence for natural persons).
What This Means for Investment Advisers
Please note that existing advisory contracts and subscription agreements that satisfied the pre-June 29, 2026, thresholds remain valid and are not subject to retroactive application. However, if an investor is added to an existing contract or fund after the effective date, such investor must meet the updated thresholds.
Advisers to private funds should update subscription agreements and other offering documents to reflect the changed thresholds. Similarly, advisers to separately managed accounts should update their advisory contracts to reflect the changed thresholds. All advisers should incorporate the changed thresholds into their compliance procedures.
