Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 under the Investment Advisers Act

June 22nd | 2021

The SEC recently approved an order that adjusts for inflation the dollar amount thresholds of the assets-under-management test (from $1,000,000 to $1,100,000) and the net worth test (from $2,100,000 to $2,200,000). 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”, which is determined by two tests: (1) the asset management test, which looks at whether the client has at least a certain dollar amount in assets under management with the adviser immediately after entering into the advisory contract; or (2) the net worth test, which is whether 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. The SEC adjusts for inflation every five years and rounds the thresholds to the nearest $100k, so this adjustment reflects inflation from 2016 to the end of 2020. The new limits are effective as of August 16, 2021.