SEC Final Rule: Investment Adviser Performance Compensation

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Gavel.png FINAL RULE: approved on February 15, 2012
Dodd-Frank Timeline, Investment Adviser Performance Compensation, SEC
Proposal Date Final Rule Issue Effective Date
May 13, 2011 February 22, 2012 May 22, 2012

On February 15, 2012, the SEC issued a final rule that tightens existing thresholds for investors who pay performance fees. The new regulations will exclude the value of an investor's home from the calculation of his or her net worth. Under the rule, a registered investment adviser may charge performance fees to "qualified clients" - those meeting certain net worth standards and can "bear the risks associated with such arrangements. [1]

Background

Among the provisions of the Dodd-Frank Act is a requirement that thresholds for "qualified client" status be raised. Also, when finalizing its net worth standards for accredited investors, the commission opted to exclude the equity value of an investor's home in the calculation. The investment adviser compensation fee rule is consistent with the accredited investor rule.

Rule Summary

The SEC revised its original proposed rule to raise certain dollar thresholds that must be met before investment advisers are allowed to collect performance compensation in the form of fees from their clients.[2]

Under the following circumstances, advisers are allowed to charge these fees:

  1. The client has at least $1 million under management with the adviser (formerly $750,000).
  2. The adviser reasonably believes the client has a net worth of $2 million (formerly $1 million).

Adjustments for inflation will be made every five years to determine whether or not clients are qualified under the Dodd-Frank Act.

A new grandfather clause was added to the final rules allowing registered investment advisers to continue charging performance fees for clients who were already counted as "qualified clients" or who were already being charged performance fees before the rules were passed.

References

  1. Investment Adviser Performance Compensation. SEC. Retrieved on February 16, 2012.
  2. SEC Tightens Rules on Advisory Performance Fee Charges. SEC. Retrieved on February 15, 2012.

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