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SEC Inflation Adjustment to “Qualified Client” Thresholds Under Rule 205-3
On April 28, 2026, the Securities and Exchange Commission (the “Commission”) issued an order (Release No. IA-6961) raising the dollar thresholds that determine whether a client qualifies as a “qualified client” under Rule 205-3 of the Investment Advisers Act of 1940. The new amounts took effect June 29, 2026.
Background
Section 205(a)(1) of the Advisers Act generally prohibits an investment adviser from charging performance fees—compensation based on a share of the capital gains or capital appreciation of a client’s funds. Section 205(e) permits the Commission to exempt contracts with clients determined not to need that protection. Rule 205-3 implements this exemption, allowing performance fees only where the client is a “qualified client,” as established through either an assets-under-management test or a net worth test. For private funds relying on Section 3(c)(1) under the Investment Company Act of 1940, as amended, each investor must satisfy the “qualified client” test.
Why the Thresholds Changed
The Dodd-Frank Act of 2010 requires the Commission to adjust these thresholds for inflation every five years, rounded to the nearest $100,000, using the Personal Consumption Expenditures (PCE) Index. Prior adjustments were issued in 2011, 2016, and 2021. The current order reflects inflation from 2021 through the end of 2025.
The New Thresholds
| Test | Previous | New |
| Assets under management | $1,100,000 | $1,400,000 |
| Net worth | $2,200,000 | $2,700,000 |
Effective Date
The order became effective June 29, 2026.
No Retroactive Effect
Advisory contracts and private fund subscriptions entered into before June 29, 2026 are generally not subject to the new thresholds, consistent with the transition (grandfathering) rules in Rule 205-3.
Next Steps
- Update fund offering documentation. Private fund advisers should confirm that fund offering and transfer documentation has been updated to reflect the current qualified client standards—for example, the questionnaires in fund subscription materials or transfer agreements for Section 3(c)(1) funds.
- Review subscriptions and transfers under the current thresholds. For subscriptions, closings, or fund transfers occurring on or after June 29, 2026, advisers should confirm that applicable investors satisfy the updated thresholds and that updated subscription materials or supplemental questionnaires have been used.
- Update compliance program and other documentation. Advisers should confirm that other materials—such as compliance policies and procedures, private placement guidelines, marketing materials, and training materials—have been updated for references to the dollar-based qualified client thresholds.
Takeaway
Clients must now hold at least $1.4 million in managed assets or have a net worth above $2.7 million before an adviser may charge performance-based fees—modestly tightening eligibility to keep pace with inflation.
Have Questions or Need Guidance?
For more information on this topic, please contact a member of our team.
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