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Alternative Market Briefing

Other Voices: SEC changes dollar threshold for qualified clients

Friday, July 23, 2021

By: Manas Kumar, Eileen Overbaugh

What You Need To Know:

Effective August 16, 2021, the Assets-Under-Management Test will increase to $1.1 million, and the Net Worth Test will increase to $2.2 million.

On June 17, 2021, the U.S. Securities and Exchange Commission issued an order (SEC Order) adjusting the dollar thresholds by which investors are considered qualified clients pursuant to Section 205-3 of the Investment Advisers Act of 1940, as amended (Advisers Act). The increased dollar thresholds will become effective on August 16, 2021 (Effective Date).

Pursuant to Section 205-3 of the Advisers Act, registered investment advisers may charge performance-based compensation solely from clients that are qualified clients. This restriction also extends to investors in private funds. Under current law, a client is considered a qualified client if (i) it has at least $1 million in assets under management with the applicable investment adviser immediately after the time of its initial investment (Assets-Under-Management Test) or (ii) the investment adviser reasonably believes, immediately prior to the time of the client's initial investment, that the investor has a net worth of more than $2.1 million (Net Worth Test). The SEC Order has raised the Assets-Under-Management Test threshold to $1.1 million and the Net Worth Test threshold to $2.2 million.

Prior to the Effective Date, registered investment advisers may continue to enter into advisory contracts and a......................

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