The Investment Advisers Act of 1940, as amended (the “Advisers Act”), generally prohibits SEC‑registered investment advisers (“RIAs”) from entering into an advisory contract that charges a performance fee to a client who is not a “qualified client” under Rule 205-3(d)(1) under the Advisers Act. Effective Monday, August 16, 2021 (the “Effective Date”), an inflation adjustment has raised two of the thresholds for determining whether a client is a “qualified client” by $100,000, as follows:
(1) The threshold for the assets-under-management test – which pegs qualified client status to a client’s dollar amount of assets under management with the RIA (calculated immediately after entering into the investment advisory contract) – has increased from $1,000,000 to $1,100,000;
(2) The threshold for the net worth test – which pegs qualified client status to a client’s net worth (based on the RIA’s reasonable belief, calculated immediately prior to entering into the investment advisory contract with such client) – has increased from $2,100,000 to $2,200,000.
The new qualified client thresholds apply to all RIA investment advisory contracts entered into on or after the Effective Date. Investment advisory contracts entered into prior to the Effective Date generally remain subject to the then-existing qualified client thresholds; however, individuals or entities who become party to such an investment advisory contract (or, in the case of a fund, individuals or entities who become investors in the fund) on or after the Effective Date will typically be subject to the new thresholds.
If you have any questions regarding the new qualified client thresholds, or about the regulation of investment advisers generally, please feel free to contact us.
By the Investment Management and Broker-Dealer Team at Kilpatrick Townsend & Stockton
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 See 15 U.S.C. § 80b-5(a)(1); 17 C.F.R. § 275.205-3(a). This applies to both separately managed account clients (where the specific client must be a qualified client) and fund clients (where each investor in the fund who is charged the performance-based fee must be a qualified client). See 17 C.F.R. § 275.205-3(b).
 Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 under the Investment Advisers Act of 1940, Advisers Act Release No. 5756 at 1-2 (June 17, 2021), https://www.sec.gov/files/ia-5756.pdf (hereinafter, “SEC Order”). The SEC is required to adjust the qualified client thresholds under Rule 205-3(d)(1)(a) and (b) for inflation, rounded to the nearest multiples of $100,000, every five years. 5 U.S.C. § 80b-5(e); 17 C.F.R. § 275.205-3(e).
 SEC Order, supra note 2, at 3.
 State registered investment advisers should review the applicable law in each jurisdiction in which they are registered or required to register to determine applicable requirements or restrictions regarding performance-based advisory fees.
 SEC Order, supra note 2, at note 12 (citing, among others, Rule 205-3(c)(1) (“If a registered investment adviser entered into a contract and satisfied the conditions of this [section] that were in effect when the contract was entered into, the adviser will be considered to satisfy the conditions of this [section]; provided, however, that if a natural person or company who was not a party to the contract becomes a party (including an equity owner of a private investment company advised by the adviser), the conditions of this [section] in effect at that time will apply with regard to that person or company.”).
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