Notice2026-08480
Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 Under the Investment Advisers Act of 1940
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
May 1, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 91 Issue 84 (Friday, May 1, 2026)</title>
</head>
<body><pre>
[Federal Register Volume 91, Number 84 (Friday, May 1, 2026)]
[Notices]
[Pages 23520-23521]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-08480]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Investment Advisers Act of 1940; Release No. IA-6961/April 28, 2026]
Order Approving Adjustment for Inflation of the Dollar Amount
Tests in Rule 205-3 Under the Investment Advisers Act of 1940
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 ``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, $1,100,000) 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, $2,200,000) (``net worth
test'').\4\
---------------------------------------------------------------------------
\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.
5756 (June 17, 2021) [81 FR 32993 (June 23, 2021)] (``2021 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).
---------------------------------------------------------------------------
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\ On February 15,
2012, the Commission amended rule 205-3 to codify the threshold amounts
revised by the 2011 Order and to state 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 based on the
Personal Consumption Expenditures Chain-Type Price Index (``PCE
Index''), which is published by the United States Department of
Commerce.\8\ 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.\9\ 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.\10\ The 2021 Amendments
[[Page 23521]]
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.
---------------------------------------------------------------------------
\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 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(e).
\9\ 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. The 2021 Order was effective as of August 16,
2021.
\10\ 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.
---------------------------------------------------------------------------
II. Adjustment of Dollar Amount Thresholds
On March 27, 2026, 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.\11\ 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 $1,100,000 to $1,400,000, and the
dollar amount of the net worth test would increase from $2,200,000 to
$2,700,000.\12\ 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 2021 to the end of 2025.
---------------------------------------------------------------------------
\11\ See Performance-Based Investment Advisory Fees, Advisers
Act Release No. 6955 (Mar. 27, 2026) [91 FR 15930 (Mar. 31, 2026)].
Because the amounts 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.
\12\ See id. at section II.A.
---------------------------------------------------------------------------
The Commission's notice established a deadline of April 27, 2026,
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 June 29, 2026. 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.\13\
---------------------------------------------------------------------------
\13\ 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, 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. 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 9, at section III; 2021 Order, supra footnote 4, at section
III.
---------------------------------------------------------------------------
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 $1,400,000 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 $2,700,000.
By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2026-08480 Filed 4-30-26; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on May 1, 2026.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.