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]

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 ( printed 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.

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.

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]

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.