SEC increased dollar amount for asset management

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INTRODUCTION

On June 17, 2021, the United States Securities and Exchange Commission (SEC) issued an order to: (i) increase the equity threshold for “qualified clients” under Rule 205-3 of the ‘Investment Advisers Act of 1940, as amended (the Advisers Act), from $ 2.1 million to $ 2.2 million; and (ii) increase the dollar amount of the asset under management threshold from US $ 1 million to US $ 1.1 million (the Order).1 The ordinance came into effect on August 16, 2021 (the effective date).

THE ORDER

A BACKGROUND

Section 205 (a) (1) of the Advisers Act generally prohibits an investment adviser from entering into, extending, renewing or performing any investment advisory contract which provides for remuneration for the adviser on the basis of a share of capital gains or capital appreciation. a client’s funds (also known as a performance fee or performance fee).2 Section 205 (e) of the Advisers Act authorizes the SEC, by rule or regulation, to exempt any person or transaction, or any class or classes of persons or transactions, from the prohibition to the extent that The exemption relates to an advisory contract entered into with anyone who, according to the SEC, does not need the protections of the prohibition, based on certain factors described in this section. Prior to the Effective Date, Rule 205-3 under the Advisers Act exempted an investment adviser from the prohibition against charging performance fees to a client where the client is a “qualified client” (i.e. the client has at least $ 1 million in assets under management with the advisor immediately after entering into an advisory contract with the advisor (the asset under management test) or if the advisor reasonably believed, immediately before entering into the contract, that the client had a net worth of more than US $ 2.1 million (the net worth test); clients who meet the definition of a “qualified buyer” in Section 2 (a) (51) (A) of the Investment Companies Act 1940, as amended (the Investment Companies Act), and some “knowledgeable employees” are also “clients qualified ”under Rule 205-3).

The Dodd-Frank Act on Wall Street Reform and Consumer Protection3 amended Section 205 (e) of the Advisors Act to provide that, by July 21, 2011 and every five years thereafter, the SEC shall adjust, by order, to reflect the effects of the inflation, dollar amount thresholds included in rules issued under section 205 (e), rounded to the nearest multiple of $ 100,000.

The SEC issued an order to revise the dollar amount thresholds for the Assets Under Management test and the net worth test (to $ 1 million and $ 2 million, respectively, as noted above) on the 12th. July 2011.4 Rule 205-3 codifies the threshold amounts revised by the 2011 ordinance and states that the SEC will issue an ordinance on or about May 1, 2016, and approximately every five years thereafter, adjusting for inflation. rule dollar amount thresholds of the Assets Under Management test. and the net worth test based on the Chain Price Index of Personal Consumption Expenditures (PCE Index) published by the US Department of Commerce. On May 10, 2021, the SEC issued a notice of intent to make an order that would adjust the dollar amount thresholds for the Assets Under Management Test and the Net Worth Test for inflation. Based on calculations that take into account the effects of inflation with reference to historical and current levels of the PCE Index, the SEC determined that the dollar amount of the Assets Under Management test would decrease from US $ 1 million to 1.1 million US dollars, and the dollar the net worth test amount would drop from 2.1 million US dollars to 2.2 million US dollars.

B. ADJUSTMENT OF THE DOLLAR AMOUNT THRESHOLDS

Therefore, as of the Effective Date, a qualified customer is any customer who:

  • Has at least $ 1.1 million in assets under management with the investment advisor immediately after entering into an advisory contract with that advisor; Where

  • Has a net worth5 (together, in the case of a client who is an individual, with assets held jointly with a spouse) that the Investment Advisor reasonably estimates to exceed $ 2.2 million immediately prior to the client’s initial investment.

Clients who have entered into investment advisory contracts prior to the Effective Date based on lower thresholds for equity or assets under management will be vested below previous thresholds and will not be affected. However, all investment advisory contracts concluded after the Effective Date will be subject to the new thresholds. Likewise, additional contributions from investors that have already been invested in a private fund before the effective date will also “vest in”. However, investments made by new investors after the Effective Date will be subject to the new thresholds. The changes will mainly affect private fund managers who rely on the exception to registration as an investment company provided for in Article 3 (c) (1) of the Law on Investment Companies, because investors in private funds who rely on the exception provided for in Article 3 (c)) (7) of the Law on Investment Companies will either be qualified buyers or knowledgeable employees.

TO TAKE AWAY

In order to ensure that the new threshold requirements provided for by the Ordinance are met, investment advisers, including 3 (c) (1) fund managers, should consider: (i) amending the form of documents subscription used for their 3 (c) (1) funds, if applicable; (ii) modify any form of managed account agreement that provides for incentive compensation; (iii) establish procedures with their operations and investor relations teams, as well as with each fund administrator, report obsolete subscription documents and managed account agreements and obtain up-to-date qualified client representations; and (iv) include confirmation of the steps described above in its annual compliance review.

FOOTNOTES

1 Rule 205-3 Dollar Amount Tests Inflation Adjustment Approval Order Under the Investment Advisers Act 1940 Version No. 5756 (June 17, 2021).

2 See 15 USC 80b-5 (a) (1).

3 Pub. L. n ° 111-203, 124 Stat. 1376 (2010).

4 See Order Approving Adjustment for Inflation of Tests of Dollar Amount in Rule 205-3 Under the Investment Advisers Act 1940, Version No. 3236 of the Advisers Act (July 12 2011) [76 Fed. Reg. 41,838 (July 15, 2011)] (the 2011 Ordinance). The 2011 ordinance came into effect on September 19, 2011.

5 Although the principal residence of a natural person should not be included as an asset, debts secured by the principal residence of the person, up to the estimated fair market value of the principal residence at the time of the conclusion of the contract. investment advisory contract, may be excluded as a liability (subject to limitations in the case of recently acquired debt). In addition, debts secured by the person’s principal residence that exceed the estimated fair market value of the residence should also be included in the liability.

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