More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
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