Section 205(a)(1) of the Investment Advisers Act of 1940 (“Advisers Act”) prohibits the use of performance-based fees for separately managed accounts (SMAs). However, an exemption exists under Advisers Act Rule 205-3 for accounts of “qualified clients” as that term is defined. A qualified client must meet certain asset thresholds under management or have a high net worth.
The Dodd-Frank Act amended Section 205(e) of the Advisers Act to provide for an inflationary adjustment to the specific assets under management and net worth requirements every five years.
It is that time now…
Currently, a qualified client is:
An account owner that has at least $1,100,000 under management with the adviser OR has a net worth of more than $2,200,000. This asset level test or net worth test must be met immediately after entering into the advisory contract for the performance fee-based account.
As of June 29, 2026 the above tests for meeting the definition of a qualified client have been changed to:
- $1,400,000 in assets under management with the adviser
OR - More than $2,700,000 in net worth
For natural person accounts, the net worth test takes into consideration assets held jointly with a spouse.
Since the tests for meeting the definition of a qualified client are performed essentially at the time of account opening, accounts that were opened prior to June 29, 2026 can still be charged performance-based fees based upon the current (lower) thresholds. However, advisory firms must be aware that any accounts opened as of June 29th must meet the new requirements.
NOW is the time for SEC registered advisers to inform employees and representatives of this change. This is especially important for client facing financial advisors and those employees involved in the account opening process.
See Investment Advisers Act of 1940; Release No. IA-6961, April 28, 2026
