SEC Tightens Rules on Advisory Performance Fee Charges

SEC Tightens Rules on Advisory Performance Fee Charges
FOR IMMEDIATE RELEASE
2012-29

Washington, D.C., Feb. 15, 2012 — The Securities and Exchange Commission today announced it is tightening its rule on investment advisory performance fees to raise the net worth requirement for investors who pay performance fees, by excluding the value of the investor’s home from the net worth calculation.
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Under the SEC’s rule, registered investment advisers may charge clients performance fees if the client’s net worth or assets under management by the adviser meet certain dollar thresholds. Investors who meet the net worth or asset threshold are deemed to be “qualified clients,” able to bear the risks associated with performance fee arrangements.

The revised rule will require “qualified clients” to have at least $1 million of assets under management with the adviser, up from $750,000, or a net worth of at least $2 million, up from $1 million. These rule changes conform the rule’s dollar thresholds to the levels set by a Commission order in July 2011. The Commission-ordered increase in the thresholds was required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. In addition, the revised rule will exclude the value of a client’s primary residence and certain property-related debts from the net worth calculation; the change was not required by the Dodd-Frank Act, but is consistent with changes the Commission approved in December to net worth calculations for determining who is an “accredited investor” eligible to invest in certain unregistered securities offerings.

A new grandfather provision to the performance fee rule will permit registered investment advisers to continue to charge clients performance fees if the clients were considered “qualified clients” before the rule changes. In addition, the grandfather provision will permit newly registering investment advisers to continue charging performance fees to those clients they were already charging performance fees.

Finally, the revised rule provides that every five years, the Commission will issue an order making inflation adjustments to the dollar thresholds used to determine whether an individual or company is a qualified client, as required by the Dodd-Frank Act.

The rule amendments will take effect 90 days after publication in the Federal Register, but investment advisers may rely on the grandfather provisions before then.

Regulatory Update for SEC Advisers

As many of you know the SEC is adopting new rules and regulations for investment advisers at a fairly rapid pace. I thought you might want a brief synopsis of some of the new rules. They can be found below along with links to the final rules. Please feel free to contact us with any questions.

1. Discussion of the SEC's Large Trader Release: On July 26, 2011, the SEC adopted a new rule establishing large trader reporting requirements to enhance the agency’s ability to identify large market participants, collect information on their trading, and analyze their trading activity. A “large trader” will be defined as a person whose transactions in exchange-listed securities equal or exceed two million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month. The Rule requires large traders to register with the Commission through a new form, Form 13H whereby the SEC will assign the trader a unique identification number. The Rule also imposes record keeping, reporting, and limited monitoring requirements on certain registered broker-dealers through whom large traders execute their transactions.

http://sec.gov/rules/final/2011/34-64976.pdf

2. Family Office Rule: The SEC recently adopted new Rule 202(a)(11)(G)-1 under the Investment Advisers Act to define the term "Family Office." Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, entities meeting the new definition of "Family Office" will be excluded from the term "investment adviser" under the Investment Advisers Act and, thus, will not be subject to SEC registration and regulation as investment advisers. This update examines the new "Family Office Rule."

http://sec.gov/rules/final/2011/ia-3220.pdf

3. New ADV Part I: The SEC is adopting new rules and rule amendments under the Investment Advisers Act of 1940 to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules and rule amendments are designed to give effect to provisions of the Title IV of the Dodd-Frank Act that, among other things, increase the statutory threshold for registration by investment advisers with the Commission, require advisers to hedge funds and other private funds to register with the Commission, and require reporting by certain investment advisers that are exempt from registration.

http://sec.gov/rules/final/2011/ia-3221.pdf