More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
The Securities and Exchange Commission announced Thursday that 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.
Under the SEC’s rule, registered investment advisors may charge clients performance fees if the client’s net worth or assets under management by the advisor 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 SEC says the revised rule will require “qualified clients” to have at least $1 million of assets under management with the advisor, up from $750,000, or a net worth of at least $2 million, up from $1 million.
These rule changes, the regulatory says, conform the rule’s dollar thresholds to the levels set by a commission order in July 2011.
The 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 SEC approved in December to net worth calculations for determining who is an “accredited investor” eligible to invest in certain unregistered securities offerings.
Karen Barr, general counsel for the Investment Adviser Association in Washington, says that with the newly announced rule, the SEC “clearly intended to sync up the method of calculating thresholds for qualified clients with the recently adopted changes to the method of calculating the thresholds for accredited investors.”
A new grandfather provision to the performance fee rule will permit registered investment advisors to continue to charge clients performance fees if the clients were considered “qualified clients” before the rule changes, the SEC says.
In addition, the grandfather provision will permit newly registering investment advisors to continue charging performance fees to those clients they were already charging such fees.
Barr says IAA is pleased that the SEC provided a “grandfathering” provision “that will enable advisors to continue their existing contractual arrangements with their clients.”
The revised rule also provides that every five years, the SEC 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 advisors may rely on the grandfather provisions before then, the SEC says