Effective September 19, 2011, the Securities and Exchange Commission amended Rule 205-3 of the Investment Advisers Act of 1940 (“Advisers Act”) which generally prohibits an investment adviser from entering into, extending, renewing or performing any investment advisory services for compensation based on a share of capital gains or capital appreciation of, the funds of a client (“performance fees”). Rule 205-3 of the Advisers Act exempts an investment adviser from the prohibition against charging performance fees in certain circumstances, including when the client is a “qualified client”. 


The amended Rule 205-3 allows an investment advisor to charge performance fees if the client has at least $1 million (raised from $750,000) in assets under the management with the investment advisor immediately after engagement for advisory services or if the investment advisor believes, immediately prior to being engaged, that the client has a net worth of more than $2 million (raised from $1.5 million) (together, in the case of a natural person, with assets held jointly with a spouse).


Investment advisors should review and amend (if necessary) their disclosure documents and offering materials to comply with the amended Rule 205-3.