Key Takeaways:
- The SEC has issued an order raising the “qualified client” thresholds. An investor or client of an SEC-registered investment adviser must generally be a qualified client in order to be charged a performance fee (or “carry”). Under the new thresholds, an investor must have either (i) at least $1,400,000 in assets under management with the investment adviser (up from $1,100,000) or (ii) a net worth of at least $2,700,000 (up from $2,200,000), not including equity in a primary residence. We note that many states condition their “private fund adviser exemption” from registration as an investment adviser on each investor in the fund being a qualified client (in some cases, even if no performance-based compensation is charged), and/or require that clients and investors in their state be a qualified client in order to be charged a performance fee or carry, so the change has a ripple effect at the state level and in many cases will still apply to a state-registered or exempt adviser.
- Existing clients and investors who met previous thresholds can continue to maintain their investments and make additional contributions without meeting the new thresholds. However, if a person becomes a party to an advisory contract (including a new investor subscribing to a Section 3(c)(1) fund) on or after June 29, 2026, the new thresholds will apply to that person.
On March 27, 2026, the SEC published a release announcing its intent to issue an order increasing the dollar thresholds in the “qualified client” definition under Rule 205-3 of the Investment Advisers Act of 1940, as amended, in order to account for inflation (such adjustment is mandated every five years). The order will raise the assets-under-management threshold to qualify as a qualified client from $1,100,000 to $1,400,000 and the net worth threshold to qualify as a qualified client from $2,200,000 to $2,700,000 (exclusive of equity in a primary residence).
The threshold increases have particular significance for private fund managers. Each investor in a private fund relying on the exemption under Section 3(c)(1) under the Investment Company Act of 1940, as amended, is treated as an individual “client” for Rule 205-3 purposes, and as a result, each investor in a 3(c)(1) fund that is charged a performance fee or carried interest must individually satisfy the qualified client definition at the time of investment. As noted above, the change has flow-through implications at the state level in many cases.
Consistent with prior adjustment orders, the new thresholds will generally not apply retroactively to relationships an investment adviser has with existing investors and clients. Existing investors and clients who met a prior threshold can continue to maintain their investments and make additional contributions without meeting the new threshold. However, if a person who was not previously a party to an advisory agreement with the investment adviser becomes a party on or after June 29, 2026 (including a new investor subscribing to a Section 3(c)(1) fund on or after June 29, 2026), the new, higher thresholds will apply to that person.
Investment advisers and private fund managers should take the following steps prior to June 29, 2026:
- Review and update subscription documents for 3(c)(1) funds, and forms of investment management agreements, so that representations and warranties relating to qualified client status accurately reference the revised thresholds.
- Update investor eligibility questionnaires so that they are consistent with the new thresholds for investors first subscribing on or after June 29, 2026.
- Coordinate with staff and fund administrators to ensure that staff and administrators are aware of the updated thresholds and that any changes are incorporated into the onboarding process for any new investors or clients.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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