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Higher Net Worth Threshold for Qualified Clients

September 2, 2016

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In June 2016, the SEC adopted a higher net worth threshold for “qualified clients” under the Investment Advisers Act of 1940 (the Advisers Act), raising it from $2 million to $2.1 million.[1] Investment advisers are exempted under the Advisers Act from the prohibition against charging client performance fees when the client is a “qualified client”. Under section 205(e) of the Advisers Act, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC is to adjust assets under management and net worth thresholds for inflation. The SEC did not make any changes to the current assets under management threshold, which remains at $1 million. The increased net worth amount became effective on August 15, 2016.

Now that the threshold to be a qualified client has been altered, it remains to be seen whether the SEC will modify the requirements for accredited investors. In December 2015, the SEC issued a staff report analyzing various approaches for adjusting the definition of an accredited investor under Regulation D of the Securities Act of 1933 (the Securities Act). This past February, the House of Representatives voted to expand the accredited investor definition in its approval of H.R. 2197, the “Fair Investment Opportunities for Professional Experts Act.”[2] This would amend section 2(a)(15) of the Securities Act to include in the definition of “accredited investor” the following:

  • Persons licensed as a broker or investment adviser with the SEC, FINRA, or state securities regulator;
  • Persons whose education or job experience qualifies as suitable professional knowledge of a subject related to a particular investment, and whose education or job experience is verified by FINRA or equivalent self-regulatory organization.

The last notable change in the accredited investor definition occurred in 2010, which excluded the inclusion of primary       residence in calculating net worth. The current financial thresholds for accredited investors have not changed in 30 years. To qualify as an accredited investor, an individual must meet one or more of the following criteria:[3]

  • Have an individual income of at least $200,000;
  • Have a combined income of at least $300,000; or
  • Have a net worth of at least $1 million (excluding primary residence)

 

[1] SEC Release No. IA-4421, June 14, 2016, Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 under the Investment Advisers Act of 1940, available at: https://www.sec.gov/rules/other/2016/ia-4421.pdf
[2] H.R. 2187, “Fair Investment Opportunities for Professional Experts Act”, available at: https://www.congress.gov/bill/114th-congress/house-bill/2187
[3] https://www.congress.gov/bill/114th-congress/house-bill/2187