On April 28, 2026, the Securities and Exchange Commission (the “SEC” or the “Commission”) issued Release No. IA-6961, approving an adjustment to the dollar amount thresholds used to determine “qualified client” status under Rule 205-3[1] of the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The new thresholds take effect on June 29, 2026, and will affect how Colorado state-licensed and SEC-registered investment advisers charge performance-based fees to clients and private fund investors.
Background
Under Section 205(a)(1) of the Advisers Act, registered investment advisers (“RIAs”) are generally prohibited from entering into or performing any investment advisory contract that provides for compensation based on a share of capital gains or appreciation in the value of a client’s funds—commonly referred to as “performance fees,” “carried interests,” or “incentive allocations.” However, RIAs are exempt from this prohibition if the client is considered a “qualified client” under Rule 205-3 under the Advisers Act. “Qualified clients” include, among others, clients meeting an assets-under-management test or a net worth test. The Dodd-Frank Act requires the Commission to adjust the dollar thresholds for these two tests for inflation every five years, rounded to the nearest $100,000.
New Thresholds
Beginning June 29, 2026, to be deemed a qualified client, a client or private fund investor must have:
- Assets-Under-Management: At least $1,400,000 (adjusted from $1,100,000) under the management of the RIA immediately after entering into the advisory arrangement; or
- Net Worth: A household net worth (excluding the value of a primary residence and related debt) of more than $2,700,000 (adjusted from $2,200,000) at the time of entering into the advisory agreement.
The adjusted thresholds will not apply retroactively or to contractual relationships entered into prior to the effective date.
Key Takeaways and Recommended Next Steps
- Update Fund Offering Documentation. Private fund advisers who oversee Section 3(c)(1) funds should review their investor questionnaires, subscription agreements, and transfer documentation to incorporate the updated dollar thresholds for qualified client eligibility.
- Update Compliance Programs. Advisers should review compliance policies and procedures, private placement guidelines, marketing materials, and training materials for references to the dollar-based qualified client thresholds and make any necessary updates.
- Review Indirect Basis Application. For RIAs advising a Section 3(c)(1) fund[2], mutual fund, or business development company under Rule 205-3(d), performance fee limitations also apply on an indirect basis. To the extent that an investor in any of these products is being charged a performance fee, review investor materials to ensure that the fund is not charging such fees to non-qualified client investors.
- Application of Indirect Basis for Colorado RIAs. The regulations adopted under the Colorado Securities Act impose additional conditions on exempt reporting advisers (“ERAs”) that advise a Section 3(c)(1) fund. For these ERAs, interests in the Section 3(c)(1) fund may be offered only to qualified clients.[3] ERAs should therefore review subscription documents to seek to ensure they do not inadvertently create a compliance gap.
- Assess Timing of Upcoming Closings. As fund sponsors prepare for upcoming initial or additional closings involving investors who will be charged a performance fee, those sponsors should account for the higher thresholds when obtaining confirmations from such investors.
For additional guidance or support, please reach out to a member of our Asset Management Group or another member of the Davis Graham Team.
[1] 17 C.F.R. §275.205-3.
[2] Note that under Rule 205-3, the fund is not required to “look through” to the investor level to determine qualified client status for Section 3(c)(5), 3(c)(7), or 3(c)(9) funds.
[3] Colorado Rule 51-4.11(c)(1)(IA).