New Qualified Client Thresholds Under the Advisers Act Take Effect June 29
The U.S. Securities and Exchange Commission (the “SEC”) issued an order adjusting the dollar thresholds for the “qualified client” standard under the U.S. Investment Advisers Act of 1940 (the “Advisers Act”).[1]
Beginning June 29, 2026, in order to meet the definition of “qualified client,” a private fund investor must have either:
For many private funds, “qualified client” status is one of several key thresholds that investors must meet as part of the subscription process in purchasing fund interests – akin to the “accredited investor” threshold under the U.S. Securities Act of 1933 or the “qualified purchaser” threshold under the U.S. Investment Company Act of 1940 (the “Company Act”).
The new thresholds apply only to investment advisory contracts entered into on or after June 29, 2026. Existing contracts are grandfathered at the previous thresholds for the AUM and Net Worth Tests, but fund sponsors should bear in mind that the new thresholds apply to existing investors entering into new fund subscriptions going forward.
Registered investment advisers (“RIAs”) generally cannot charge clients or private fund investors performance-based compensation unless the client and its private fund investors meet the qualified client standard.
Fund sponsors should review their subscription documents as well as any investment management agreements or other compliance documentation to ensure that they are updated with the new thresholds prior to June 29. In particular, any fund closings held after June 29 should utilize subscription documents with the new qualified client thresholds, to the extent applicable.
Background
Section 205(a)(1) of the Advisers Act prohibits RIAs from entering into an investment advisory contract that provides for compensation to the adviser on the basis of a share of capital gains or capital appreciation. This would, on its face, prohibit RIAs from accepting carried interest or similar profit shares as compensation. Under Rule 205-3, however, the Section 205(a)(1) prohibition will not apply if the client or private fund investor entering into the contract is a qualified client.[2]
Under Rule 205-3(d), a qualified client is defined to mean (i) any natural person or company that meets the AUM Test, (ii) any natural person or company that meets the Net Worth Test, or (iii) any natural person or company that already meets the “qualified purchaser” or “knowledgeable employee” standards under the Company Act. An entity that is itself comprised solely of beneficial owners who all meet the qualified client standard is deemed a qualified client.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, which significantly amended the Advisers Act, required the SEC to update the thresholds for the qualified client definitions every five years for inflation. The SEC most recently raised the thresholds, effective August 2021, from $1 million to $1.1 million for the AUM Test and from $2.1 million to $2.2 million for the Net Worth Test.
Applicability to exempt advisers
Exempt advisers, including exempt reporting advisers (“ERAs”) relying on either the venture capital fund adviser exemption or the private fund adviser exemption, are not subject to the Section 205(a)(1) prohibition and, therefore, are not prohibited from accepting performance-based compensation from non-qualified clients. Moreover, to the extent an ERA determines that it needs to register as an RIA, Rule 205-3(b)(2) provides that the prohibition does not apply to those advisory contracts entered into when the adviser was not required to register and was not registered.
Despite the fact that advisory contracts with non-qualified clients are grandfathered prior to registration, many ERAs still find it useful to determine their investors’ qualified client status solely as a precautionary measure in the event that they one day become RIAs. Moreover, the qualified client standard is sometimes relevant to state-level investment advisory laws.
Conclusion
Shulman Rogers regularly represents both registered investment advisers and exempt reporting advisers in connection with Advisers Act compliance, including investor qualifications and other client requirements, from disclosure to custody to marketing. We continue to monitor developments under the Advisers Act and all securities laws and SEC rulemaking.
[1] Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 under the Investment Advisers Act of 1940, SEC Rel. No. IA-6961 (April 28, 2026).
[2] Note that under the Advisers Act generally, the fund and/or investment vehicle is considered the “client” for most investment advisory purposes (i.e., an adviser provides investment advice to the fund, and not to its individual investors). Rule 205-3, however, expressly requires advisers to look through the client to apply the qualified client threshold to each fund investor when the fund is relying on Section 3(c)(1) of the Company Act for its exemption from registration as an investment company.
More Information
The contents of this Alert are for informational purposes only and do not constitute legal advice. If you have any questions about this Alert, please contact Kevin Lees, Scott Museles, Kimberly Mann, or the Shulman Rogers attorney with whom you regularly work.
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