Proposed Rule2026-06229
Performance-Based Investment Advisory Fees
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
March 31, 2026
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission (the "Commission") intends to issue an order that would adjust for inflation dollar amount thresholds in the rule under the Investment Advisers Act of 1940 that permits investment advisers to charge performance-based fees to "qualified clients." Under that rule, an investment adviser may charge performance-based fees if a "qualified client" has a certain minimum net worth or minimum dollar amount of assets under the management of the adviser. The Commission's order would increase, to reflect inflation, the minimum net worth that a "qualified client" must have under the rule. The order would also increase, to reflect inflation, the minimum dollar amount of assets under management.
Full Text
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<title>Federal Register, Volume 91 Issue 61 (Tuesday, March 31, 2026)</title>
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[Federal Register Volume 91, Number 61 (Tuesday, March 31, 2026)]
[Proposed Rules]
[Pages 15930-15932]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-06229]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 275
[Release No. IA-6955]
Performance-Based Investment Advisory Fees
AGENCY: Securities and Exchange Commission.
ACTION: Notice of intent to issue order.
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SUMMARY: The Securities and Exchange Commission (the ``Commission'')
intends to issue an order that would adjust for inflation dollar amount
thresholds in the rule under the Investment Advisers Act of 1940 that
permits investment advisers to charge performance-based fees to
``qualified clients.'' Under that rule, an investment adviser may
charge performance-based fees if a ``qualified client'' has a certain
minimum net worth or minimum dollar amount of assets under the
management of the adviser. The Commission's order would increase, to
reflect inflation, the minimum net worth that a ``qualified client''
must have under the rule. The order would also increase, to reflect
inflation, the minimum dollar amount of assets under management.
DATES: Hearing requests should be received by the Commission's Office
of the Secretary by 5:30 p.m. on April 27, 2026.
ADDRESSES: Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary. Any such
communication should be emailed to the Commission's Secretary at
<a href="/cdn-cgi/l/email-protection#f1a2949283948590838882dcbe9797989294b1829492df969e87"><span class="__cf_email__" data-cfemail="aefdcbcddccbdacfdcd7dd83e1c8c8c7cdcbeeddcbcd80c9c1d8">[email protected]</span></a>. Hearing requests should state the nature of
the writer's interest, the reason for the request, and the issues
contested.
FOR FURTHER INFORMATION CONTACT: Daniel Levine, Senior Counsel, at
(202) 551-3937, Investment Adviser Regulation Office, Division of
Investment Management, Securities and Exchange Commission, 100 F Street
NE, Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION: The Commission intends to issue an order
under the Investment Advisers Act of 1940 (``Advisers Act'' or
``Act'').\1\
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\1\ 15 U.S.C. 80b. Unless otherwise noted, all references to
statutory sections are to the Advisers Act, and all references to
rules under the Advisers Act, including rule 205-3, are to Title 17,
Part 275 of the Code of Federal Regulations [17 CFR 275].
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I. Background
Section 205(a)(1) of the 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.\2\ In 1970, Congress
provided an exception from the prohibition for advisory contracts
relating to the investment of assets in excess of $1,000,000,\3\ if an
appropriate ``fulcrum fee'' is used.\4\ Congress subsequently
authorized the Commission to exempt, by rule or order, 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 that prohibition.\5\
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\2\ 15 U.S.C. 80b-5(a)(1).
\3\ 15 U.S.C. 80b-5(b)(2). Trusts, governmental plans,
collective trust funds, and separate accounts referred to in section
3(c)(11) of the Investment Company Act of 1940 (``Investment Company
Act'') [15 U.S.C. 80a-3(c)(11)] are not eligible for this exception
from the performance fee prohibition under section 205(b)(2)(B) of
the Advisers Act.
\4\ 15 U.S.C. 80b-5(b). A fulcrum fee generally involves
averaging the adviser's fee over a specified period and increasing
or decreasing the fee proportionately with the investment
performance of the company or fund in relation to the investment
record of an appropriate index of securities prices. See rule 205-2
under the Advisers Act; Adoption of Rule 205-2 under the Investment
Advisers Act of 1940, As Amended, Definition of ``Specified Period''
Over Which Asset Value of Company or Fund Under Management is
Averaged, Advisers Act Release No. 347 (Nov. 10, 1972) [37 FR 24895
(Nov. 23, 1972)]. In 1980, Congress added another exception to the
prohibition against charging performance fees, for contracts
involving business development companies under certain conditions.
See section 205(b)(3) of the Advisers Act.
\5\ Section 205(e) of the Advisers Act. Section 205(e) of the
Advisers Act authorizes the Commission to exempt conditionally or
unconditionally from the performance fee prohibition advisory
contracts with persons that the Commission determines do not need
its protections. Section 205(e) provides that 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].''
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[[Page 15931]]
The Commission adopted rule 205-3 in 1985 to exempt an investment
adviser from the prohibition against charging a client performance fees
in certain circumstances.\6\ The rule, when adopted, allowed an adviser
to charge performance fees if the client had at least $500,000 under
management with the adviser immediately after entering into the
advisory contract (``assets-under-management test'') or if the adviser
reasonably believed, immediately prior to entering into the advisory
contract, that the client had a net worth of more than $1,000,000 at
the time the contract was entered into (``net worth test''). The
Commission stated that these standards would limit the availability of
the exemption to clients who are financially experienced and able to
bear the risks of performance fee arrangements.\7\ In 1998, the
Commission amended rule 205-3 to, among other things, change the dollar
amounts of the assets-under-management test and net worth test to
adjust for the effects of inflation since 1985.\8\ The Commission
revised the former from $500,000 to $750,000, and the latter from
$1,000,000 to $1,500,000.\9\
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\6\ Exemption To Allow Registered Investment Advisers To Charge
Fees Based Upon a Share of Capital Gains Upon or Capital
Appreciation of a Client's Account, Advisers Act Release No. 996
(Nov. 14, 1985) [50 FR 48556 (Nov. 26, 1985)] (``1985 Adopting
Release''). The exemption applies to the entrance into, performance,
renewal, and extension of advisory contracts. See rule 205-3(a).
\7\ See 1985 Adopting Release, supra footnote 6, at Sections I.C
and II.B. The rule also imposed other conditions, including specific
disclosure requirements and restrictions on calculation of
performance fees. See id. at Sections II.C-E.
\8\ See Exemption To Allow Investment Advisers To Charge Fees
Based Upon a Share of Capital Gains Upon or Capital Appreciation of
a Client's Account, Advisers Act Release No. 1731 (July 15, 1998)
[63 FR 39022 (July 21, 1998)].
\9\ See id. at Section II.B.1.
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The Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act'') \10\ 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.\11\ In May 2011, the
Commission published a release (the ``May 2011 Release'') that included
a notice of intent to issue an order revising the dollar amount
thresholds of the assets-under-management test (from $750,000 to
$1,000,000) and the net worth test (from $1,500,000 to $2,000,000).\12\
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\10\ Public Law 111-203, 124 Stat. 1376 (2010).
\11\ 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).
\12\ See Investment Adviser Performance Compensation, Advisers
Act Release No. 3198 (May 10, 2011) [76 FR 27959 (May 13, 2011)].
The Commission issued an order to revise the dollar amount
thresholds of the assets-under-management and net worth tests, as
described above, on July 12, 2011. 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. The 2011 Order
applied to contractual relationships entered into on or after the
effective date and did not apply retroactively to contractual
relationships previously in existence.
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The May 2011 Release also proposed amendments to rule 205-3
providing, among other things, that the Commission would issue an order
every five years in the future adjusting the rule's dollar amount
thresholds for inflation.\13\ On February 15, 2012, the Commission
adopted these proposed amendments, which amended rule 205-3 to carry
out the inflation adjustment of the rule's dollar amount
thresholds.\14\ Rule 205-3, as amended in 2012, stated that the
Commission would 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,\15\ and specified the price index on which future
inflation adjustments would be based--the Personal Consumption
Expenditures Chain-Type Price Index (``PCE Index''), which is published
by the United States Department of Commerce \16\ and is used in other
provisions of the Federal securities laws.\17\
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\13\ See May 2011 Release, supra footnote 12.
\14\ See Investment Adviser Performance Compensation, Advisers
Act Release No. 3372 (Feb. 15, 2012) [77 FR 10358 (Feb. 22, 2012)]
(amending rule 205-3 by, in part, revising the dollar amount
thresholds to codify the 2011 Order); see also rule 205-3(d)(1)(i)
through (ii).
\15\ See rule 205-3(e).
\16\ See rule 205-3(e)(1). The PCE Index is an indicator of
inflation in the personal sector of the U.S. economy. See
Performance-Based Investment Advisory Fees, Advisers Act Release No.
4388 (May 18, 2016) [81 FR 32686 (May 24, 2016)], at text
accompanying n.20.
\17\ See e.g., Qualifying Venture Capital Funds Inflation
Adjustment, Investment Company Act Release No. 35305 (Aug. 21, 2024)
[89 FR 70479 (Aug. 30, 2024)] (adjusting for inflation the dollar
threshold used in defining a ``qualifying venture capital fund''
under the Investment Company Act); Definitions of Terms and
Exemptions Relating to the ``Broker'' Exceptions for Banks,
Securities Exchange Act Release No. 56501 (Sept. 24, 2007) [72 FR
56514 (Oct. 3, 2007)] (adopting periodic inflation adjustments to
the fixed-dollar thresholds for both ``institutional customers'' and
``high net worth customers'' under Rule 701 of Regulation R);
Amendments to Form ADV, Advisers Act Release No. 3060 (July 28,
2010) [75 FR 49234 (Aug. 12, 2010)] (increasing for inflation the
threshold amount for prepayment of advisory fees that triggers an
adviser's duty to provide clients with an audited balance sheet and
the dollar threshold triggering the exception to the delivery of
brochures to advisory clients receiving only impersonal advice). The
Dodd-Frank Act also requires the use of the PCE Index to calculate
inflation adjustments for the cash limit protection of each investor
under the Securities Investor Protection Act of 1970. See section
929H(a) of the Dodd-Frank Act; see also Securities Investor
Protection Corporation, Securities Investor Protection Act of 1970
Release No. 183 (Jan. 27, 2021) [86 FR 7900 (Feb. 2, 2021)].
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On June 14, 2016 and June 17, 2021, the Commission issued orders
adjusting for inflation, as appropriate, the dollar amount thresholds
of the assets-under-management test and the net worth test.\18\ In
November 2021, the Commission amended rule 205-3 to replace the
specific dollar amount thresholds in the rule's net worth and assets-
under-management tests with references to the specific dollar amount
thresholds adjusted for inflation in the most recent order issued by
the Commission.\19\ The 2021 Amendments also updated the specific
reference point in paragraph (e) of rule 205-3 from May 1, 2016 to ``on
or about May 1, 2026, and approximately every five years thereafter''
to establish the next expected date for issuance of a Commission order.
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\18\ 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''). The 2016 Order was effective as
of August 15, 2016. 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. 5756 (June 17, 2021) [86 FR 32993
(June 23, 2021)] (``2021 Order''). The 2021 Order was effective as
of August 16, 2021.
\19\ See Performance-Based Investment Advisory Fees, Advisers
Act Release No. 5904 (Nov. 4, 2021) [86 FR 62473 (Nov. 10, 2021)]
(``2021 Amendments''). The 2021 Amendments define ``most recent
order'' as the most recently issued Commission order in accordance
with paragraph (e) of rule 205-3 and as published in the Federal
Register.
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As of August 16, 2021, the dollar amount of the assets-under-
management test is $1,100,000, and the dollar amount of the net worth
test is $2,200,000.\20\
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\20\ See 2021 Order.
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Hearing or Notification of Hearing: An order adjusting the dollar
amount tests specified in the definition of ``qualified client'' will
be issued unless the Commission orders a hearing.
II. Discussion
A. Order Adjusting Dollar Amount Tests
Pursuant to section 418 of the Dodd-Frank Act and rule 205-3(e), we
are
[[Page 15932]]
providing notice \21\ that the Commission intends to issue an order
making the required inflation adjustment to the assets-under-management
test and the net worth test in the definition of ``qualified client''
in rule 205-3. As discussed above, rule 205-3(e) requires that we
adjust the dollar amount thresholds of the rule by order on or about
May 1, 2026, and approximately every five years thereafter. We intend
to issue an order that would increase the dollar amount of the assets-
under-management test from $1,100,000 to $1,400,000 and would increase
the dollar amount of the net worth test from $2,200,000 to $2,700,000.
As required under rule 205-3, both dollar amounts would take into
account the effects of inflation by reference to historic and current
levels of the PCE Index. Because the amount of the Commission's
inflation adjustment calculations are larger than the rounding amount
specified under rule 205-3, the dollar amounts of both tests would be
adjusted as a result of the Commission's inflation adjustment
calculation effected pursuant to the rule.\22\
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\21\ See section 211(c) of the Advisers Act (requiring the
Commission to provide appropriate notice of and opportunity for
hearing for orders issued under the Advisers Act).
\22\ Specifically, rule 205-3(e) provides that the adjusted
dollar amounts shall be computed by: (1) dividing the year-end value
of the PCE Index (or any successor index thereto) for the calendar
year preceding the calendar year in which the order is being issued
(in this case, 2025), by the year-end value of the PCE Index (or
successor) for the calendar year 1997 (such quotient, the
``Adjustment Percentage''); (2) for the assets-under-management
test, multiplying $750,000 by the Adjustment Percentage and rounding
the product to the nearest multiple of $100,000; and (3) for the net
worth test, multiplying $1,500,000 by the Adjustment Percentage and
rounding the product to the nearest multiple of $100,000. As of
March 26, 2026, the end-of-year 2025 PCE Index was 128.214, and the
end-of-year 1997 PCE Index was 70.710. Assets-under-management test
calculation to adjust for the effects of inflation: (128.214/70.710)
x $750,000 = $1,359,927.87; $1,359,927.87 rounded to the nearest
multiple of $100,000 = $1,400,000. Net worth test calculation to
adjust for the effects of inflation: (128.214/70.710) x $1,500,000 =
$2,719,855.75; $2,719,855.75 rounded to the nearest multiple of
$100,000 = $2,700,000. The values of the PCE Index are available
from the Bureau of Economic Analysis, a bureau of the United States
Department of Commerce. See <a href="http://www.bea.gov">http://www.bea.gov</a>; see also Bureau of
Economic Analysis, Table 2.3.4., ``Price Indexes for Personal
Consumption Expenditures by Major Type of Product,'' available at
<a href="https://apps.bea.gov/iTable/?reqid=19&step=3&isuri=1&select_all_years=0&nipa_table_list=64&series=a&first_year=1997&last_year=2020&scale=-99&categories=survey&thetable#eyJhcHBpZCI6MTksInN0ZXBzIjpbMSwyLDMsM10sImRhdGEiOltbInNlbGVjdF9hbGxfeWVhcnMiLCIwIl0sWyJuaXBhX3RhYmxlX2xpc3QiLCI2NCJdLFsic2VyaWVzIiwiUSJdLFsiZmlyc3RfeWVhciIsIjE5OTUiXSxbImxhc3RfeWVhciIsIjIwMjUiXSxbInNjYWxlIiwiMCJdLFsiY2F0ZWdvcmllcyIsIlN1cnZleSJdLFsidGhldGFibGUiLCIiXV19=">https://apps.bea.gov/iTable/?reqid=19&step=3&isuri=1&select_all_years=0&nipa_table_list=64&series=a&first_year=1997&last_year=2020&scale=-99&categories=survey&thetable#eyJhcHBpZCI6MTksInN0ZXBzIjpbMSwyLDMsM10sImRhdGEiOltbInNlbGVjdF9hbGxfeWVhcnMiLCIwIl0sWyJuaXBhX3RhYmxlX2xpc3QiLCI2NCJdLFsic2VyaWVzIiwiUSJdLFsiZmlyc3RfeWVhciIsIjE5OTUiXSxbImxhc3RfeWVhciIsIjIwMjUiXSxbInNjYWxlIiwiMCJdLFsiY2F0ZWdvcmllcyIsIlN1cnZleSJdLFsidGhldGFibGUiLCIiXV19=</a> (last visited March 26, 2026).
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B. Effective Date
We anticipate that, if we issue the order described above, the
effective date will be 60 days following the order date.\23\ 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.\24\
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\23\ When the Commission issued the 2011, 2016, and 2021 Orders
adjusting the dollar amount tests of rule 205-3 as described above,
the effective dates of the Orders were approximately 60 days
following their issuance. See 2011 Order, supra footnote 12, at
section III; 2016 Order, supra footnote 18, at section III; 2021
Order, supra footnote 18, at section III.
\24\ 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 May 2011 Release, supra
footnote 12, at section II.B.3.
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By the Commission.
Dated: March 27, 2026.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2026-06229 Filed 3-30-26; 8:45 am]
BILLING CODE 8011-01-P
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