What is a Qualified Client?
The Investment Advisers Act
In 1940, the United States Congress passed the Investment Advisers Act. This act created several registration requirements that continue to be changed today in both the federal and state security division landscapes. The 1940 Act made it unlawful for most financial advisers to charge performance fees to its clients and customers. This would be a fee based upon the performance of the client’s portfolio, as opposed to an asset under management (AUM) model.
Rule 205-3
Rule 205-3 provides an exemption from this prohibition on performance-based compensation when the client is considered a “qualified client.” This rule provides that an advisor, including a fund manager of a Private Equity Fund, can charge a performance fee based upon on the performance of the portfolio or the fund. The advisor can do so if the client:
(1) has more than $1,000,000 in assets under management with the adviser
(2) has a net worth of $2,100,000 prior to investing
(3) is a qualified purchaser
(4) is an officer or director of the private fund manager.
In these instances, advisers and fund managers can charge a performance-based fee, in addition to charging a fee for the assets under management.
For more information
If you have questions about Securities Law, adviser registration and compliance, private equity funds, hedge funds, or compliance with Rule 205-3 of the Investment Advisers Act of 1940, please contact our office at (513) 241-0400. You can also fill out the contact form on our website and one of our attorneys will respond shortly.