SEC proposes rule on performance fees

The Securities and Exchange Commission proposed a rule this week under the Dodd-Frank Act that would adjust the threshold amounts for inflation that a “qualified client” must meet before an investment advisor can charge performance fees.

Under the Investment Advisers Act of 1940, an advisor can charge for performance fees if the firm manages at least $750,000 of a client's assets and if the client's net worth exceeds $1.5 million. The SEC has proposed raising the thresholds to $1 million under management and $2 million for total net worth. The adjustment would take effect 21 July, with future changes made every five years.

“Because of the ability of investment advisors to attract qualified clients who satisfy the proposed standards, and the ability of non-qualified clients to invest in other investment opportunities that do not entail performance fees, we expect that the proposed rule would not have a significant impact on capital formation,” said Elizabeth Murphy, the SEC’s secretary, in the proposal.

The SEC also proposed a rule that would require the agency to show the method for calculating inflation adjustments to exclude the client's primary residence in calculating net worth.

The amendments are not likely to impose a significant net cost on advisors, according to the SEC proposal. The SEC is accepting comments on the proposal through 11 July.