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Alternative Market Briefing

Other Voices: SEC updates rule on performance fees

Tuesday, June 29, 2021

By: Anthony Drenzek, Robert Plaze

On June 17th, the Securities and Exchange Commission issued an order adjusting the dollar amount thresholds for clients of registered advisers to be "qualified clients" under rule 205-3 of the Investment Advisers Act of 1940, and thus permitted to pay a "performance fee" under the rule. The Order amends rule 205-3(d)(1) to increase the assets-under-management test 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. The Order will be effective on August 16, 2021.

Section 205 of the Advisers Act generally prohibits a registered investment adviser from entering into or renewing any investment advisory contracts with a client that provides for compensation to the adviser based on a share of capital gains on, or capital appreciation of, the account of a client (a "performance fee"). Both hedge fund performance fees and private equity fund carried interest allocations are forms of performance fees covered by Section 205. Rule 205-3 provides an exemption from the general performance-based fee prohibition for advisers to private funds whose investors (typically limited partners) are "qualified clients" meeting the financial thresholds.

This adjustment was made pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, which amended section 205(e) of the Advisers Act to require the Commission to adjust for the effects of inflation the dollar amount thresholds included in......................

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