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The Securities and Exchange Commission (“SEC”) has issued an increase for the dollar-based threshold to be considered a Qualified Client (“QC”) as part of their routine inflation adjustments, which occur every five years. The updated thresholds, effective June 29, 2026, are $1.4 million in assets under management and $2.7 million in net worth.
These increases are standard. The Dodd-Frank Wall Street Reform and Consumer Protection Act amended Section 205(e) of the Investment Act of 1940 (“Advisors Act”), mandating adjustment of these thresholds every five years to account for the effects of inflation.
What is a Qualified Client?
Section 205(a)(1) of the Investment Act of 1940 generally prohibits any SEC-registered investor from contracting for performance-based compensation, whether the compensation is in the form of capital gains, capital appreciation, or just based on a share of the client’s assets.
The exception to this rule applies to any client who is a QC. The SEC assumes that investors with a large portfolio either have the resources to be informed or are sophisticated investors and therefore can weigh the benefits and risks that come with this type of contractual agreement.
The SEC has a standard test that any investor must pass to be considered a QC. The test consists of two alternative paths; the investor must have either a given number of assets-under-management or a minimum net worth.
New Qualified Client Threshold Amounts
Pursuant to the new thresholds, on June 29, 2026, a client must either have assets under management (“AUM”) of $1.4 million or a net worth of $2.7 million. These new thresholds reflect increases from $1.1 million and $2.2 million respectively.
| Dollar Amount Thresholds | Previous Amount | New Amount | Effective Date |
| AUM | $1,100,000 | $1,400,000 | June 29, 2026 |
| Net Worth | $2,200,000 | $2,700,000 | June 29, 2026 |
Effective Date of New Threshold
The SEC issued an order on April 28, 2026, making the inflation-adjusted increases pursuant to the SEC’s obligation under Section 418 of the Dodd-Frank Act. This order takes effect on June 29, 2026, and will apply to any contractual relationships formed on that day and thereafter.
Implications
Pre-existing agreements: To the extent previous contractual relationships are entered upon pursuant to the previous threshold amount, these changes will not be retroactive. Any investor already in a contractual agreement will be “grandfathered” in regardless of reaching the new threshold. Advisers can continue to use the lower qualified client thresholds to enter agreements with clients until the effective date of June 29, 2026.
Reduced Investor Availability: The higher thresholds result in a reduced number of investors that can satisfy the requirements to be a QC.
*Summer Associate Jacob Dally contributed to this alert.
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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