The Securities and Exchange Commission (SEC) has raised the dollar thresholds for “qualified client” status under Rule 205-3 of the Investment Advisers Act of 1940 (Advisers Act).1 The increases, which will take effect on June 29, are the SEC’s required five-year inflation adjustments and will require private fund advisers and other SEC-registered investment advisers to review and, where applicable, update their fund offering documents, investment management agreements, and related compliance and disclosure materials before the effective date.

What Changed

Two new thresholds apply, effective June 29:

  1. Assets under management test: $1.4 million managed by the adviser at the time the advisory contract becomes effective, up from $1.1 million.
  2. Net worth test: $2.7 million, up from $2.2 million. Spousal assets qualify; the investor’s primary residence and related debt do not.

An investor must satisfy one of the foregoing tests to be a qualified client.

Why It Matters

Section 205(a)(1) of the Advisers Act prohibits an SEC-registered adviser from charging performance-based compensation, including carried interest and incentive fees, unless the client or fund investor is a qualified client.2 Section 205(e) requires the SEC to reset the dollar thresholds every five years to reflect inflation, and the last reset was in 2021.

For many private fund advisers, the practical reach of the new thresholds may be narrower than it first appears. Qualified purchasers and knowledgeable employees are deemed qualified clients, and the performance fee prohibition does not apply to non-U.S. investors. The thresholds therefore matter primarily for advisers to Section 3(c)(1) funds, separately managed accounts where the client is not a qualified purchaser or knowledgeable employee, and registered funds.

New Investors/Clients and Existing Investors/Clients

Application turns on when the advisory contract is entered into. Contracts in place before June 29 remain subject to the current thresholds. An existing fund investor who qualified at subscription generally does not need to retest against the higher thresholds.3 Similarly, an existing managed account client does not need to retest under the same investment management agreement against the higher thresholds.

What To Do Before June 29

Advisers should take the following steps in advance of the effective date:

  • Review and update subscription documents, investor questionnaires, and qualified client representations, including transfer documentation for Section 3(c)(1) funds.
  • Review and update investment management agreements for separately managed accounts and other arrangements that include performance-based compensation.
  • Confirm that compliance policies and procedures, marketing materials, and any private placement memoranda reference the updated dollar amounts, as applicable.
  • Assess the timing of any upcoming closings, new investor admissions, or transfers scheduled around June 29 and determine whether to admit investors under the current thresholds before the effective date or apply new thresholds.
  • Coordinate with outside counsel and fund administrators on the rollout of revised documents.

For closings that straddle the effective date, advisers may want supplemental subscription materials capturing both threshold sets so that investors admitted before June 29 can be tested against the current thresholds and those admitted on or after can be tested against the new thresholds.

Next Steps

For further information, guidance, and clarity on how advisers can prepare for the new qualified client thresholds, please reach out to the authors of this article or to your regular Lowenstein Sandler contact.

1 https://www.sec.gov/files/rules/ia/2026/ia-6961.pdf
2 See Rule 205-3 of the Advisers Act for exemption.
3 See Rule 205-3(c) of the Advisers Act for application of the transition provisions.