On April 28, 2026, the U.S. Securities and Exchange Commission issued an order increasing the financial thresholds investors must satisfy to qualify as a 'qualified client' under Rule 205-3 of the Investment Advisers Act of 1940. The revised thresholds take effect on June 29, 2026, and will directly affect which investors may be charged performance-based compensation by registered investment advisers and private fund sponsors.
Under the updated order, the assets-under-management threshold rises from $1.1 million to $1.4 million, and the net worth threshold increases from $2.2 million to $2.7 million, in each case excluding the equity value of the investor's primary residence. These higher thresholds reflect the SEC's periodic inflation-based adjustments and continue the agency's practice of narrowing eligibility for performance-fee arrangements to investors with greater financial resources.
The new thresholds apply prospectively. Advisory agreements and fund subscription agreements entered into on or after June 29, 2026 must reflect the higher figures, and advisers will need to confirm that each new investor meets the updated criteria before charging performance-based fees. As a practical matter, advisers and private fund sponsors should plan to revise subscription documents, investor questionnaires, accredited and qualified client representations, and related compliance procedures well in advance of the effective date. Internal training for client-facing personnel and onboarding teams will also be important to ensure consistent application of the new standards.
Importantly, the order includes grandfathering relief for existing relationships. Investors and clients who previously qualified under the prior thresholds may continue their existing investments and make additional contributions to those investments without being required to satisfy the higher dollar amounts. This relief should reduce administrative disruption for current investors, although advisers should still confirm that grandfathered status is properly documented in their books and records.
Investment advisers, private fund managers, and their counsel should begin reviewing form documents, marketing materials, and compliance manuals now to ensure that all new arrangements entered into on or after June 29, 2026 comply with the revised thresholds.
This alert is provided for general informational purposes only and does not constitute legal advice. Clients facing specific questions about Rule 205-3 or their compliance obligations should consult counsel for advice tailored to their particular circumstances.