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A Qualified Client Threshold

Posted on July 15th, 2021
Posted by Muhammad Akram, CPA

On August 16, 2021, ” a qualified client threshold” under Rule 205‑3 of the Investment Advisers Act of 1940 (“Advisers Act”) will increase (i) from $1 million to $1.1 million (assets under management test), and (ii) from $2.1 million to $2.2 million (net worth test).

Subscription documents for certain private funds and investment management agreements for certain separately managed accounts will need to be updated by August 16, 2021, to reflect new “qualified client” assets-under-management and net worth thresholds.

These changes directly affect private funds relying on the 3(c)(1) exemption, but many 3(c)(7) documents contain qualified client representations and may need to be updated.

A Qualified Client Threshold

A qualified client is an investor or client that is not affiliated with the adviser and that satisfies an assets-under-management test or a net worth test which, as of August 16, 2021, will be increased (as a result of a re-indexing performed every five years) as follows:

i) The threshold for assets under management by the adviser will increase from $1 million to $1.1 million.

ii) The investor or client net worth threshold (which includes spousal assets) will increase from $2.1 million to $2.2 million excluding the client’s or investor’s primary residence and related debt.

In general, only new investors and clients are affected by this change. Most existing fund investments and SMA arrangements are grandfathered (for example, investors who previously invested in a 3(c)(1) fund and met the prior threshold can continue to make investments in that 3(c)(1) fund without meeting the new threshold). Transfers of fund interests may be grandfathered, but should be analyzed.

Registered investment advisers should consider the following steps:

i) Amend the form subscription documents being used for 3(c)(1) funds.

ii) Amend any forms for SMA agreements that provide for incentive compensation.

iii) Review form subscription documents for non-3(c)(1) funds and amend any qualified client representations.

iv) Establish controls to prevent future distributions of un-amended subscription documents and SMA agreements.

v) Establish procedures with the adviser’s operations and investor relations teams, and with each fund administrator, to flag unamended subscription documents and SMA agreements and to obtain updated qualified client representations. Consider including a confirmation of these steps into the annual compliance review.


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