Insight

SEC Increases Qualified Client Thresholds

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Summary

On June 17, 2021, the U.S. Securities and Exchange Commission (“SEC”) issued an Order Approving Adjustments for Inflation of the Dollar Amount Tests in Rule 205-3 (“Order”).[1] The Order increased the dollar amount of the assets-under-management test for Qualified Clients from $1,000,000 to $1,100,000, and the dollar amount of the net-worth test from $2,100,000 to $2,200,000.[2] To view the entire Order, please click here.

New Thresholds for Qualified Clients

The SEC Order revised the definition of a Qualified Client in Rule 205-3 as follows:

  • A natural person who, or a company that, immediately after entering into the contract has at least $1,100,000 under the management of the investment adviser.
  • A natural person who, or a company that, the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $2,200,000.

Effective Date

The new thresholds will become effective on August 16, 2021. To the extent that contractual relationships are entered into prior to the Order’s effective date, the dollar amount test adjustments would not generally apply retroactively to such contractual relationships, subject to the transition rules incorporated in Rule 205-3.

Take Action

As a result of the revised thresholds, firms should incorporate the newly adjusted Qualified Client thresholds into their:

  • Investment advisory contracts 
  • Separately managed account agreements
  • Fund offering documents
  • Investment management agreements
  • Fund subscription documents
  • Any other records or filings that specify Qualified Client thresholds

It is highly advisable, if not imperative, that our clients use their counsel’s help, guidance, and assistance in reviewing and amending agreements and fund documents, i.e., revising legal documents.[3]

If you have any questions about the contents of this alert or if you would like to discuss it in more detail, please reach out to your regular IQ-EQ compliance contact.

[1] Please note that Rule 205-3 applies to investment advisers who are registered or required to be registered with the SEC. State registered or reporting investment advisers would need to verify whether the jurisdiction(s) where they provide advisory services have adopted comparable provisions.

[2] The remaining provisions of Rule 205-3 were not altered by the Order.

[3] In this Client Alert, IQ-EQ is providing its observations, advice, and recommendations. IQ-EQ did not and does not provide legal advice regarding its services nor did it or does it provide any assurance regarding the outcome of any future audit or regulatory examination or other regulatory action. It is further understood that recipients of this Client Alert have responsibility for, among other things, identifying and confirming compliance with laws and regulations applicable to their activities, and for establishing and maintaining effective internal controls to confirm such compliance.