The Securities and Exchange Commission announced on May 4 that it intends to adjust the dollar amount thresholds required for investment advisers to charge performance-based fees to “qualified clients.” The adjustment, scheduled for 2026, will reflect inflation as mandated by the Investment Advisers Act.
The update is significant because it affects which clients are eligible for performance-based fee arrangements. These arrangements include incentive fees and carried interest, commonly used by private funds and advisers working with high-net-worth individuals.
Under the proposed changes, the minimum net worth threshold will increase from $1,100,000 to $1,400,000. The assets under management requirement will also rise from $2,200,000 to $2,700,000. These tests determine whether a client qualifies for such fee structures. Existing advisory contracts signed before the effective date can continue using the old thresholds; however, new agreements must comply with the updated amounts once they take effect.
Advisers are encouraged to review their compliance programs in light of these upcoming changes. This includes updating private placement memoranda and limited partnership agreements referencing qualified client status. Advisory agreements and eligibility forms should also be revised accordingly. Firms may need new procedures with fund administrators to track which clients qualify under previous versus new standards based on contract signing dates.
The SEC emphasized that proper application of these thresholds is critical due to ongoing regulatory scrutiny regarding fees and investor protection. Deficient agreements using outdated minimums could be easily identified during examinations or through automated tools.
Fairview Investment Services said it would continue monitoring developments impacting investment advisers’ compliance programs: “We will continue to monitor new developments that impact investment advisers and compliance programs. If you have questions, contact us. Fairview is here to help.”
