Today, the Securities and Exchange Commission (SEC) announced its plan to raise certain dollar thresholds that would need to be met before investment advisers can charge their clients performance fees. Performance fees, also known as “carried interest”, are a feature of almost all private equity funds, venture capital funds, hedge funds and other “alternative investment” vehicles.
Currently, Rule 205-3 under the Investment Advisers Act allows an adviser to charge its clients performance fees in only a limited number of circumstances, including where either (a) the client has at least $750,000 under management with the adviser; or (b) the adviser reasonably believes the client has a net worth of more than $1.5 million. In the context of hedge funds and private equity funds, “clients” would refer to the prospective investors in these funds.
The SEC is required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), by July 21, 2011, and every five years thereafter, to adjust for inflation these dollar amount thresholds. Accordingly, the SEC today announced that it intends to issue an order to revise the dollar amount tests to $1 million for assets under management and $2 million for net worth.
The SEC also went on to propose further amendments to Rule 205-3 that would (a) provide the method for calculating future inflation adjustments of the dollar amount tests, (b) exclude the value of a person’s primary residence from the determination of whether a person meets the net worth standard and (c) modify the transition provisions of the rule to take into account performance fee arrangements that were permissible at the time the adviser and client entered into their advisory contract.
As a result, a significant number of individual investors who may previously have been eligible to invest in these alternative funds will soon be excluded.
So much for getting into the venture capital fund that backs the next Skype!
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