The U.S. Securities and Exchange Commission issued a number of proposing releases today, including one that would allow investment advisors to charge certain regulated funds performance-based compensation and that would update the qualified client definition. In addition, the SEC announced that it is seeking comment on the addition of certain licenses, designations, and other credentials to the “accredited investor” definition that demonstrate an investor’s sophistication in securities-related areas.
Performance Fees
- Under the proposal, investment advisors to registered investment companies and business development companies, meeting certain conditions, would be permitted to receive performance-based compensation calculated based on the capital gains or capital appreciation in the respective fund’s account.
- Importantly, the proposed amendments would also update the qualified client definition to include investors meeting the accredited investor definition under Regulation D of the Securities Act of 1933 and remove the current net worth ($2.7 million) and assets under management ($1.4 million) tests from the qualified client definition.
- The conditions the investment advisors would need to satisfy in order to charge performance based compensation to regulated funds would include that the performance-based compensation not exceed 20% of the fund’s net gains over a specified period.
- The advisor would also need to satisfy fund governance standards under the Investment Company Act and the board of the regulated fund would need to determine that the performance fees are in the best interests of the fund and its shareholders.
Accredited Investor Definition
- The SEC is considering adding a new accredited investor examination developed by FINRA that would allow a natural person to qualify for accredited investor status.
- In addition, the SEC is considering allowing natural persons to qualify for accredited investor status if they hold, in good standing, a CPA license, a CFA charter, a CFP certification in the United States, the FINRA Investment Banking Representative license (Series 79), or the FINRA Research Analyst license (Series 86 and 87).
The SEC will allow public comments for 60 days following the publication of the proposing releases and the notices in the Federal Register. Adoption of the proposing releases would likely occur in 2027.
For more information about these rule changes, please contact NCA Compliance.
Hayley Nelson is the President and Principal Consultant of NCA Compliance, Inc., a compliance consulting firm providing a wide range of customized compliance solutions for investment advisors. Ms. Nelson previously worked for the Securities and Exchange Commission and a large investment manager in New York.
