SEC Expects to Raise Bar for Advisers and Fund Managers Charging Performance Fees
The SEC issued notice that it intends to raise the dollar thresholds for allowing registered investment advisers (including fund managers) to charge performance based fees. Under the current rule (205-3), a registered investment adviser may only receive compensation based on a share of capital gains on, or capital appreciation of, client funds (aka a performance fee) if the client has a net worth of more than $1.5 Million or has at least $750,000 in assets under management with the adviser. The SEC intends to raise the thresholds to $2 Million and $1 Million, respectively. The net worth test would exclude the value of a client’s primary residence. The new thresholds will take effect no later than July 21, 2011 and will be adjusted every 5 years based on inflation. The transition rules allow firms to grandfather in current clients and their follow-on investments. The rule applies to investors in registered funds and private funds (unless all investors are qualified purchasers).
OUR TAKE: These changes will have a significant impact on hedge and private equity managers, most of whom charge performance fees. Raising the net worth requirement to $2 Million and excluding the value of a client’s personal residence will likely exclude many potential investors.