81 FR 39985 - Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 Under the Investment Advisers Act of 1940
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 118 (June 20, 2016)
Federal Register Volume 81, Issue 118 (June 20, 2016)
| Page Range | 39985-39986 | |
| FR Document | 2016-14450 |
[Federal Register Volume 81, Number 118 (Monday, June 20, 2016)] [Notices] [Pages 39985-39986] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-14450] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Investment Advisers Act of 1940; Release No. IA-4421/June 14, 2016] 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 persons who the Commission determines do 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 in certain circumstances when the client is a ``qualified client.'' 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 had a net worth of more than a [[Page 39986]] certain dollar amount (currently, $2,000,000) (``net worth test'').\3\ --------------------------------------------------------------------------- \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\ See rule 205-3(d)(1)(i)-(ii); see also infra note 6 and accompanying text. --------------------------------------------------------------------------- The Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'') \4\ amended section 205(e) of the Advisers Act to provide that, by July 21, 2011 and every five years thereafter, the Commission shall adjust for inflation the dollar amount thresholds included in rules issued under section 205(e), rounded to the nearest $100,000.\5\ The Commission last 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.\6\ Rule 205-3 currently 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).\7\ --------------------------------------------------------------------------- \4\ Public Law 111-203, 124 Stat. 1376 (2010). \5\ See section 418 of the Dodd-Frank Act (requiring the Commission to issue an order every five years revising dollar amount thresholds in a rule that exempts a person or transaction from section 205(a)(1) of the Advisers Act if the dollar amount threshold was a factor in the Commission's determination that the persons do not need the protections of that section). \6\ See text accompanying supra note 3; Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 under the Investment Advisers Act of 1940, Investment 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. It applies to contractual relationships entered into on or after the effective date and does not apply retroactively to contractual relationships previously in existence. \7\ See rule 205-3(e). --------------------------------------------------------------------------- II. Adjustment of Dollar Amount Thresholds On May 18, 2016, the Commission published a notice of intent to issue an order that would adjust for inflation, as appropriate, the dollar amount thresholds of the asset-under-management test and the net worth test.\8\ 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 remain $1,000,000, and the dollar amount of the net worth test would increase from $2,000,000 to $2,100,000.\9\ These dollar amounts--which are rounded to the nearest $100,000 as required by section 205(e) of the Advisers Act--would reflect inflation from 2011 to the end of 2015. --------------------------------------------------------------------------- \8\ See Investment Adviser Performance Compensation, Investment Advisers Act Release No. 4388 (May 18, 2016) [81 FR 32686 (May 24, 2016)]. While the dollar amount of the assets under-management test would not change, because the amount of the Commission's inflation adjustment calculation is smaller than the rounding amount specified under rule 205-3, the dollar amount of the net worth test would be adjusted as a result of Commission's inflation adjustment calculation effected pursuant to the rule. \9\ See id. at section II.A. --------------------------------------------------------------------------- The Commission's notice established a deadline of June 13, 2016 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 15, 2016. 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.\10\ --------------------------------------------------------------------------- \10\ 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, Investment Advisers Act Release No. 3198 (May 10, 2011) [76 FR 27959 (May 13, 2011)], at section II.B.3. --------------------------------------------------------------------------- IV. Conclusion Accordingly, pursuant to section 205(e) of the Investment Advisers Act of 1940 and section 418 of the Dodd-Frank Act, It is hereby ordered that, for purposes of rule 205-3(d)(1)(i) under the Investment Advisers Act of 1940 [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 $1,000,000 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 Investment Advisers Act of 1940 [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 $2,100,000. By the Commission. Brent J. Fields, Secretary. [FR Doc. 2016-14450 Filed 6-17-16; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 81, No. 118 / Monday, June 20, 2016 / Notices 39985
rely on a calculation of Consolidated the public interest; (ii) for the protection For the Commission, by the Division of
Volume will be handled by the of investors; or (iii) otherwise in Trading and Markets, pursuant to delegated
Exchange during the annual Russell furtherance of the purposes of the Act. authority.7
Indexes reconstitution. Currently, the If the Commission takes such action, the Robert W. Errett,
rule text could be interpreted to apply Commission shall institute proceedings Deputy Secretary.
to only a member organization’s trading to determine whether the proposed rule [FR Doc. 2016–14448 Filed 6–17–16; 8:45 am]
activity under a fee or credit tier that is should be approved or disapproved.
BILLING CODE 8011–01–P
expressed as a ratio or percentage of IV. Solicitation of Comments
Consolidated Volume. The Exchange
believes that, should it ever adopt a Interested persons are invited to
submit written data, views, and SECURITIES AND EXCHANGE
credit or fee tier based on another COMMISSION
measure of Consolidated Volume, such arguments concerning the foregoing,
an interpretation would undermine the including whether the proposed rule
Exchange’s intent to exclude the change is consistent with the Act. [Investment Advisers Act of 1940; Release
abnormal trading activity that occurs on Comments may be submitted by any of No. IA–4421/June 14, 2016]
that day. Accordingly, the Exchange the following methods:
Order Approving Adjustment for
believes that it is reasonable to remove Electronic Comments Inflation of the Dollar Amount Tests in
the potentially confusing rule text.
The Exchange believes that deleting • Use the Commission’s Internet Rule 205–3 Under the Investment
rule text from the preamble of Rule comment form (http://www.sec.gov/ Advisers Act of 1940
7018(a) concerning Consolidated rules/sro.shtml); or
• Send an email to rule-comments@ I. Background
Volume is an equitable allocation and is
sec.gov. Please include File Number SR–
not unfairly discriminatory because the Section 205(a)(1) of the Investment
BX–2016–029 on the subject line.
proposed change only serves to clarify Advisers Act of 1940 (‘‘Advisers Act’’)
the application of the rule and does not Paper Comments generally prohibits an investment
alter how Consolidated Volume is • Send paper comments in triplicate adviser from entering into, extending,
calculated. Thus, the Exchange will to Brent J. Fields, Secretary, Securities renewing, or performing any investment
apply the same process to all similarly and Exchange Commission, 100 F Street advisory contract that provides for
situated member organizations that seek NE., Washington, DC 20549–1090. compensation to the adviser based on a
to qualify under a fee or credit tier share of capital gains on, or capital
All submissions should refer to File
under the rule that relies on a appreciation of, the funds of a client
Number SR–BX–2016–029. This file
calculation of Consolidated Volume. (also known as performance
number should be included on the
compensation or performance fees).1
B. Self-Regulatory Organization’s subject line if email is used. To help the
Section 205(e) authorizes the Securities
Statement on Burden on Competition Commission process and review your
and Exchange Commission
The Exchange does not believe that comments more efficiently, please use
(‘‘Commission’’) to exempt any advisory
the proposed rule change will impose only one method. The Commission will
contract from the performance fee
any burden on competition not post all comments on the Commission’s
prohibition if the contract is with
necessary or appropriate in furtherance Internet Web site (http://www.sec.gov/
persons who the Commission
of the purposes of the Act. The rules/sro.shtml).
Copies of the submission, all determines do not need the protections
proposed rule change is being made to of the prohibition, on the basis of
clarify the rule and avoid potential subsequent amendments, all written
statements with respect to the proposed certain factors described in that
market participant confusion that may section.2 Rule 205–3 under the Advisers
be caused by the existing rule text. As rule change that are filed with the
Commission, and all written Act exempts an investment adviser from
such, the Exchange does not believe that the prohibition against charging a client
the proposed change places any burden communications relating to the
proposed rule change between the performance fees in certain
on competition whatsoever. circumstances when the client is a
Commission and any person, other than
C. Self-Regulatory Organization’s those that may be withheld from the ‘‘qualified client.’’ The rule allows an
Statement on Comments on the public in accordance with the adviser to charge performance fees if the
Proposed Rule Change Received From provisions of 5 U.S.C. 552, will be client has at least a certain dollar
Members, Participants, or Others available for Web site viewing and amount in assets under management
printing in the Commission’s Public (currently, $1,000,000) with the adviser
No written comments were either immediately after entering into the
solicited or received. Reference Room, 100 F Street NE.,
Washington, DC 20549, on official advisory contract (‘‘assets-under-
III. Date of Effectiveness of the business days between the hours of management test’’) or if the adviser
Proposed Rule Change and Timing for 10:00 a.m. and 3:00 p.m. Copies of the reasonably believes, immediately prior
Commission Action filing also will be available for to entering into the contract, that the
The foregoing rule change has become inspection and copying at the principal client had a net worth of more than a
effective pursuant to Section office of the Exchange. All comments
7 17 CFR 200.30–3(a)(12).
received will be posted without change;
asabaliauskas on DSK3SPTVN1PROD with NOTICES
19(b)(3)(A)(ii) of the Act.6 1 15 U.S.C. 80b–5(a)(1).
At any time within 60 days of the the Commission does not edit personal 2 Under section 205(e), the Commission may
filing of the proposed rule change, the identifying information from determine that persons do not need the protections
Commission summarily may submissions. You should submit only of section 205(a)(1) on the basis of such factors as
temporarily suspend such rule change if information that you wish to make ‘‘financial sophistication, net worth, knowledge of
it appears to the Commission that such available publicly. and experience in financial matters, amount of
assets under management, relationship with a
action is: (i) Necessary or appropriate in All submissions should refer to File registered investment adviser, and such other
Number SR–BX–2016–029 and should factors as the Commission determines are consistent
6 15 U.S.C. 78s(b)(3)(A)(ii). be submitted on or before July 11, 2016. with [section 205].’’ 15 U.S.C. 80b–5(e).
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![39986 Federal Register / Vol. 81, No. 118 / Monday, June 20, 2016 / Notices
certain dollar amount (currently, the effects of inflation by reference to with assets held jointly with a spouse)
$2,000,000) (‘‘net worth test’’).3 historic and current levels of the PCE of more than $2,100,000.
The Dodd-Frank Wall Street Reform Index, the dollar amount of the assets- By the Commission.
and Consumer Protection Act (‘‘Dodd- under-management test would remain Brent J. Fields,
Frank Act’’) 4 amended section 205(e) of $1,000,000, and the dollar amount of the
the Advisers Act to provide that, by July Secretary.
net worth test would increase from
21, 2011 and every five years thereafter, [FR Doc. 2016–14450 Filed 6–17–16; 8:45 am]
$2,000,000 to $2,100,000.9 These dollar
the Commission shall adjust for amounts—which are rounded to the BILLING CODE 8011–01–P
inflation the dollar amount thresholds nearest $100,000 as required by section
included in rules issued under section 205(e) of the Advisers Act—would
205(e), rounded to the nearest SECURITIES AND EXCHANGE
reflect inflation from 2011 to the end of
$100,000.5 The Commission last issued COMMISSION
2015.
an order to revise the dollar amount The Commission’s notice established [Release No. SIPA–177; File No. SIPC–2016–
thresholds of the assets-under- a deadline of June 13, 2016 for 01]
management and net worth tests (to submission of requests for a hearing. No
$1,000,000 and $2,000,000, respectively, requests for a hearing have been Securities Investor Protection
as discussed above) on July 12, 2011.6 received by the Commission. Corporation; Notice of Filing of
Rule 205–3 currently codifies the Proposed Bylaw Amendments Relating
threshold amounts revised by the 2011 III. Effective Date of the Order to Assessment of SIPC Members
Order and states that the Commission This Order is effective as of August June 15, 2016.
will issue an order on or about May 1, 15, 2016. To the extent that contractual
2016, and approximately every five Pursuant to section 3(e)(1) of the
relationships are entered into prior to Securities Investor Protection Act of
years thereafter, adjusting for inflation the Order’s effective date, the dollar
the dollar amount thresholds of the 1970 (‘‘SIPA’’),1 on May 2, 2016 the
amount test adjustments in the Order Securities Investor Protection
rule’s assets-under-management and net would not generally apply retroactively
worth tests based on the Personal Corporation (‘‘SIPC’’) filed with the
to such contractual relationships, Securities and Exchange Commission
Consumption Expenditures Chain-Type subject to the transition rules
Price Index (‘‘PCE Index,’’ published by (‘‘Commission’’) proposed bylaw
incorporated in rule 205–3.10 amendments relating to assessments on
the United States Department of
Commerce).7 IV. Conclusion SIPC member broker-dealers. On May
27, 2016, SIPC consented to a 60-day
II. Adjustment of Dollar Amount Accordingly, pursuant to section extension of time before the proposed
Thresholds 205(e) of the Investment Advisers Act of bylaw amendments take effect pursuant
1940 and section 418 of the Dodd-Frank to section 3(e)(1) of SIPA.2 Pursuant to
On May 18, 2016, the Commission
Act, section 3(e)(1)(B) of SIPA, the
published a notice of intent to issue an
order that would adjust for inflation, as It is hereby ordered that, for purposes Commission finds that this proposed
appropriate, the dollar amount of rule 205–3(d)(1)(i) under the bylaw change involves a matter of such
thresholds of the asset-under- Investment Advisers Act of 1940 [17 significant public interest that public
management test and the net worth CFR 275.205–3(d)(1)], a qualified client comment should be obtained.3
test.8 The Commission stated that, based means a natural person who, or a Therefore, pursuant to section 3(e)(2)(A)
on calculations that take into account company that, immediately after of SIPA,4 the Commission is publishing
entering into the contract has at least this notice to solicit comments on the
3 See rule 205–3(d)(1)(i)–(ii); see also infra note 6 $1,000,000 under the management of proposed bylaw change from interested
and accompanying text. the investment adviser; and persons.
4 Public Law 111–203, 124 Stat. 1376 (2010). It is further ordered that, for purposes In its filing with the Commission,
5 See section 418 of the Dodd-Frank Act
of rule 205–3(d)(1)(ii)(A) under the SIPC included statements concerning
(requiring the Commission to issue an order every Investment Advisers Act of 1940 [17
five years revising dollar amount thresholds in a the purpose of and statutory basis for
rule that exempts a person or transaction from CFR 275.205–3(d)(1)(ii)(A)], a qualified the proposed bylaw amendments as
section 205(a)(1) of the Advisers Act if the dollar client means a natural person who, or a described below, which description has
amount threshold was a factor in the Commission’s company that, the investment adviser
determination that the persons do not need the been substantially prepared by SIPC.
protections of that section).
entering into the contract (and any
6 See text accompanying supra note 3; Order person acting on his behalf) reasonably I. SIPC’s Statement of the Purpose of,
Approving Adjustment for Inflation of the Dollar believes, immediately prior to entering and Statutory Basis for, Proposed SIPC
Amount Tests in Rule 205–3 under the Investment into the contract, has a net worth Bylaw Amendments Relating to
Advisers Act of 1940, Investment Advisers Act (together, in the case of a natural person, Assessment of SIPC Members
Release No. 3236 (July 12, 2011) [76 FR 41838 (July
15, 2011)] (‘‘2011 Order’’). The 2011 Order was Overview
effective as of September 19, 2011. It applies to 9 See id. at section II.A.
contractual relationships entered into on or after the 10 See rule 205–3(c)(1) (‘‘If a registered investment Pursuant to Section 3(e)(1) of SIPA,
effective date and does not apply retroactively to adviser entered into a contract and satisfied the SIPC submits this statement of the
contractual relationships previously in existence. conditions of this section that were in effect when purpose of, and statutory basis for,
7 See rule 205–3(e).
the contract was entered into, the adviser will be proposed amendments to the SIPC
asabaliauskas on DSK3SPTVN1PROD with NOTICES
8 See Investment Adviser Performance considered to satisfy the conditions of this section;
Compensation, Investment Advisers Act Release Provided, however, that if a natural person or Assessments Bylaw.5 Among other
No. 4388 (May 18, 2016) [81 FR 32686 (May 24, company who was not a party to the contract things, the Assessments Bylaw, at
2016)]. While the dollar amount of the assets under- becomes a party (including an equity owner of a Article 6 of the SIPC Bylaws (‘‘Article
management test would not change, because the private investment company advised by the
amount of the Commission’s inflation adjustment adviser), the conditions of this section in effect at 1 15 U.S.C. 78ccc(e)(1).
calculation is smaller than the rounding amount that time will apply with regard to that person or 2 15
specified under rule 205–3, the dollar amount of the company.’’); see also Investment Adviser U.S.C. 78ccc(e)(1).
3 15 U.S.C. 78ccc(e)(1)(B).
net worth test would be adjusted as a result of Performance Compensation, Investment Advisers
4 15 U.S.C. 78ccc(e)(2)(A).
Commission’s inflation adjustment calculation Act Release No. 3198 (May 10, 2011) [76 FR 27959
effected pursuant to the rule. (May 13, 2011)], at section II.B.3. 5 15 U.S.C. 78ccc(e)(1).
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Document Created: 2016-06-18 00:09:10
Document Modified: 2016-06-18 00:09:10
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 39985 |
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