Notice2021-13192
Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 Under the Investment Advisers Act of 1940
Primary source
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Published
June 23, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 118 (Wednesday, June 23, 2021)</title>
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[Federal Register Volume 86, Number 118 (Wednesday, June 23, 2021)]
[Notices]
[Pages 32993-32994]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-13192]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 5756]
Order Approving Adjustment for Inflation of the Dollar Amount
Tests in Rule 205-3 Under the Investment Advisers Act of 1940
June 17, 2021.
I. Background
Section 205(a)(1) of the Investment Advisers Act of 1940
(``Advisers Act'') generally prohibits an investment adviser from
entering into, extending, renewing, or performing any investment
advisory contract that provides for compensation to the adviser based
on a share of capital gains on, or capital appreciation of, the funds
of a client (also known as performance compensation or performance
fees).\1\ Section 205(e) authorizes the Securities and Exchange
Commission (``Commission'') to exempt any advisory contract from the
performance fee prohibition if the contract is with any person that the
Commission determines does not need the protections of the prohibition,
on the basis of certain factors described in that section.\2\ Rule 205-
3 under the Advisers Act exempts an investment adviser from the
prohibition against charging a client performance fees when the client
is a
[[Page 32994]]
``qualified client.'' \3\ The rule allows an adviser to charge
performance fees if the client has at least a certain dollar amount in
assets under management (currently, $1,000,000) with the adviser
immediately after entering into the advisory contract (``assets-under-
management test'') or if the adviser reasonably believes, immediately
prior to entering into the contract, that the client has a net worth of
more than a certain dollar amount (currently, $2,100,000) (``net worth
test'').\4\
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\1\ 15 U.S.C. 80b-5(a)(1).
\2\ Under section 205(e), the Commission may determine that
persons do not need the protections of section 205(a)(1) on the
basis of such factors as ``financial sophistication, net worth,
knowledge of and experience in financial matters, amount of assets
under management, relationship with a registered investment adviser,
and such other factors as the Commission determines are consistent
with [section 205].'' 15 U.S.C. 80b-5(e).
\3\ The exemption applies to the entrance into, performance,
renewal, and extension of advisory contracts. See rule 205-3(a).
\4\ See rule 205-3(d)(1)(i)-(ii); see also Order Approving
Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3
under the Investment Advisers Act of 1940, Advisers Act Release No.
4421 (June 14, 2016) [81 FR 39985 (June 20, 2016)] (``2016 Order'').
Rule 205-3 includes other definitions of ``qualified client'' that
do not reference specific dollar amount tests. See, e.g., rule 205-
3(d)(1)(ii)(B) and rule 205-3(d)(1)(iii).
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The Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act'') \5\ amended section 205(e) of the Advisers Act to
provide that, by July 21, 2011 and every five years thereafter, the
Commission shall, by order, adjust for the effects of inflation the
dollar amount thresholds included in rules issued under section 205(e),
rounded to the nearest multiple of $100,000.\6\ The Commission issued
an order to revise the dollar amount thresholds of the assets-under-
management and net worth tests (to $1,000,000 and $2,000,000,
respectively, as discussed above) on July 12, 2011.\7\ Rule 205-3
codifies the threshold amounts revised by the 2011 Order and states
that the Commission will issue an order on or about May 1, 2016, and
approximately every five years thereafter, adjusting for inflation the
dollar amount thresholds of the rule's assets-under-management and net
worth tests based on the Personal Consumption Expenditures Chain-Type
Price Index (``PCE Index,'' published by the United States Department
of Commerce).\8\ On June 14, 2016, the Commission issued an order
adjusting for inflation, as appropriate, the dollar amount thresholds
of the assets-under-management test and the net worth test (to
$1,000,000 and $2,100,000, respectively).\9\
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\5\ Public Law 111-203, 124 Stat. 1376 (2010).
\6\ See section 418 of the Dodd-Frank Act (requiring the
Commission to issue an order every five years revising dollar amount
tests in a rule that exempts a person or transaction from section
205(a)(1) of the Advisers Act if the dollar amount test was a factor
in the Commission's determination that the persons do not need the
protections of that section).
\7\ See Order Approving Adjustment for Inflation of the Dollar
Amount Tests in Rule 205-3 under the Investment Advisers Act of
1940, Advisers Act Release No. 3236 (July 12, 2011) [76 FR 41838
(July 15, 2011)] (``2011 Order''). The 2011 Order was effective as
of September 19, 2011. Id.
\8\ See rule 205-3(e).
\9\ See 2016 Order, supra footnote 4. The 2016 Order was
effective as of August 15, 2016. Id. As a result of the 2016 Order,
the dollar amount threshold of the net worth test was increased to
$2,100,000, but the dollar amount threshold of the assets-under-
management test remained at $1,000,000. Id.
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II. Adjustment of Dollar Amount Thresholds
On May 10, 2021, the Commission published a notice of intent to
issue an order that would adjust for inflation the dollar amount
thresholds of the assets-under-management test and the net worth
test.\10\ The Commission stated that, based on calculations that take
into account the effects of inflation by reference to historic and
current levels of the PCE Index, the dollar amount of the assets-under-
management test would increase from $1,000,000 to $1,100,000, and the
dollar amount of the net worth test would increase from $2,100,000 to
$2,200,000.\11\ These dollar amounts--which are rounded to the nearest
multiple of $100,000 as required by section 205(e) of the Advisers
Act--would reflect inflation from 2016 to the end of 2020.
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\10\ See Performance-Based Investment Advisory Fees, Advisers
Act Release No. 5733 (May 10, 2021) [86 FR 26685 (May 17, 2021)].
Because the amount of the Commission's inflation adjustment
calculations are larger than the rounding amount specified under
rule 205-3, the dollar amount of both tests would be adjusted as a
result of the Commission's inflation adjustment calculation effected
pursuant to the rule.
\11\ See id. at section II.A.
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The Commission's notice established a deadline of June 4, 2021 for
submission of requests for a hearing. No requests for a hearing have
been received by the Commission.
III. Effective Date of the Order
This Order is effective as of August 16, 2021. To the extent that
contractual relationships are entered into prior to the Order's
effective date, the dollar amount test adjustments in the Order would
not generally apply retroactively to such contractual relationships,
subject to the transition rules incorporated in rule 205-3.\12\
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\12\ See rule 205-3(c)(1) (``If a registered investment adviser
entered into a contract and satisfied the conditions of this
[section] that were in effect when the contract was entered into,
the adviser will be considered to satisfy the conditions of this
[section]; Provided, 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), the conditions of this [section] in effect at that time
will apply with regard to that person or company.''); see also
Investment Adviser Performance Compensation, Advisers Act Release
No. 3198 (May 10, 2011) [76 FR 27959 (May 13, 2011)], at section
II.B.3. The 2011 Order and 2016 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. See Investment Adviser Performance Compensation, Advisers
Act Release No. 3372 (Feb. 15, 2012) [77 FR 10358 (Feb. 22, 2012)],
at section I, n.16; 2016 Order, supra footnote 4, at section III.
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IV. Conclusion
Accordingly, pursuant to section 205(e) of the Advisers Act and
section 418 of the Dodd-Frank Act,
It is hereby ordered that, for purposes of rule 205-3(d)(1)(i)
under the Advisers Act [17 CFR 275.205-3(d)(1)], a qualified client
means a natural person who, or a company that, immediately after
entering into the contract has at least $1,100,000 under the management
of the investment adviser; and
It is further ordered that, for purposes of rule 205-3(d)(1)(ii)(A)
under the Advisers Act [17 CFR 275.205-3(d)(1)(ii)(A)], a qualified
client means a natural person who, or a company that, the investment
adviser entering into the contract (and any person acting on his
behalf) reasonably believes, immediately prior to entering into the
contract, has a net worth (together, in the case of a natural person,
with assets held jointly with a spouse) of more than $2,200,000.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13192 Filed 6-22-21; 8:45 am]
BILLING CODE 8011-01-P
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