SEC Raises Advisers Act “Qualified Client” Dollar-Based Thresholds

Effective June 29, 2026, the SEC is increasing the dollar-based thresholds that define a “qualified client” in Rule 205-3(d) (Rule) under the Investment Advisers Act of 1940 (Advisers Act).¹ The SEC is required to adjust these thresholds for inflation approximately every five years. The thresholds are adjusted using the Personal Consumption Expenditures Chain-Type Price Index (PCE Index), published by the U.S. Department of Commerce, rounded to the nearest $100,000.

The Advisers Act prohibits SEC-registered investment advisers (RIAs) from entering into, extending, renewing, or performing any investment advisory contract that provides for compensation on the basis of a share of the capital gains upon, or the capital appreciation of, client funds (i.e., carry and other performance-based fees).²

The Rule, however, provides an exemption and permits RIAs to collect such performance-based fees when a:

• Private fund and each of its investors; or
• Registered investment company and each of its investors; or
• Separately managed account client (SMA)

meets the definition of “qualified client.”³

Importantly, because “qualified purchasers” (as defined in Section 2(a)(51) of the Investment Company Act of 1940 (Company Act)) and “knowledgeable employees” of an adviser are each automatically deemed “qualified clients” under the Rule, the new thresholds have no practical impact on advisers to funds relying on Section 3(c)(7) of the Investment Company Act — whose investors by definition must be qualified purchasers. The threshold adjustments are primarily relevant to advisers to Section 3(c)(1) funds — the 100-investor limit — and to advisers managing separately managed accounts for clients who are not qualified purchasers.

New Thresholds

As of June 29, 2026, to satisfy the definition of “qualified client,” the fund and each fund investor paying the performance-based fee or SMA must meet either the:

• “assets-under-management test” of $1,400,000 (up from $1,100,000) with the investment adviser upon entering into the advisory relationship⁴; or
• “net worth test” of $2,700,000 (up from $2,200,000) upon entering into the advisory relationship.⁵

Effective Date

The Order is effective on June 29, 2026. If a registered investment adviser enters into an advisory contract prior to June 29, 2026, and the arrangements satisfy the conditions in effect at the time, the adviser has satisfied the qualified client requirement. Note, however, that if a natural person or company who was not a party to the contract becomes a party (including an equity owner of a private investment company advised by the adviser) on or after June 29, 2026, the new conditions in effect at that time will apply with regard to that person or company.

Note that the previous similar orders regarding the “qualified client” definition — the 2011 Order, 2016 Order, and 2021 Order — each applied to contractual relationships entered into on or after the effective date and did not apply retroactively to contractual relationships previously in existence.

Follow Up

• Update fund-related documents. For any fund that will not hold a final close before June 29, 2026, update offering documents, subscription documents, investor questionnaires, transfer documents, marketing materials, and any other fund documents that reference the qualified client dollar-amount thresholds.
• Update compliance program materials. Review and update compliance policies and procedures, guidelines, and training materials, as needed, to reflect the new thresholds.

Footnotes

1. See Federal Register :: Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 Under the Investment Advisers Act of 1940. ↩

2. Section 205(a)(1). ↩

3. Note that the performance fee prohibition under Section 205(a)(1) generally does not apply to non-U.S. person investors in a private fund, so the qualified client analysis under the Rule is typically relevant only with respect to U.S. persons. ↩

4. The “assets-under-management test” measures the assets the fund investor or SMA has under the management of the investment adviser and includes the gross asset value of current investments plus committed but uncalled capital. ↩

5. The “net worth test” measures assets held jointly with spouse but excludes the value of the primary residence and related debt. ↩

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