SEC Raises the Bar on Qualified Clients. Here's What Changed.
A mandatory inflation adjustment to Rule 205-3 takes effect June 29, 2026, raising the thresholds that determine who qualifies for performance-based fee arrangements.
On April 28, 2026, the U.S. Securities and Exchange Commission issued a final order adjusting the dollar thresholds that define a "qualified client" under Rule 205-3 of the Investment Advisers Act of 1940. The changes go live on June 29, 2026, and will affect every SEC-registered investment adviser that charges performance-based compensation.
This is not a discretionary rule change. The SEC is required by law to review and adjust these thresholds every five years using the Personal Consumption Expenditures (PCE) price index, rounding results to the nearest $100,000. The last adjustment was in 2021.
What is a Qualified Client?
Under the Advisers Act, SEC-registered investment advisers are generally prohibited from charging fees based on a share of capital gains or appreciation in a client's portfolio. Performance fees, carried interest, and incentive allocations all fall into this category.
There is an exception. If a client meets the definition of a "qualified client," an adviser may charge performance-based compensation. The definition is based on two tests: one tied to assets under management with the adviser, and one tied to the client's net worth.
The idea is that wealthier clients are better positioned to absorb the risk that comes with performance-based fee structures.
The New Numbers
Assets under management test
A client must have at least $1.4 million in assets under management with the adviser immediately after entering into the advisory arrangement. This is up from the previous threshold of $1.1 million.
Net worth test
Alternatively, a client may qualify if their net worth exceeds $2.7 million at the time of entering the advisory arrangement. This figure includes assets held jointly with a spouse but excludes the value of a primary residence and any associated debt. The previous threshold was $2.2 million.
Meeting either test is sufficient. A client does not need to satisfy both.
Who is Affected, and How
The most direct impact is on SEC-registered investment advisers and private fund managers who charge performance fees or carried interest. For advisers managing funds structured under Section 3(c)(1) of the Investment Company Act, the implications are especially significant.
In a Section 3(c)(1) fund, each individual investor is treated as a separate "client" for Rule 205-3 purposes. That means every investor charged a performance fee must independently qualify under the new thresholds. A fund with 50 investors charging carried interest needs 50 individual qualified client determinations.
Funds relying on Section 3(c)(7) are largely unaffected. Those funds restrict investment to "qualified purchasers," a separate and higher standard under the Investment Company Act, and qualified purchasers are automatically deemed qualified clients under Rule 205-3.
Existing Investors are not Affected Retroactively
Consistent with previous adjustment orders, the SEC is not applying the new thresholds retroactively. Investors and clients who entered into advisory arrangements before June 29, 2026, and who qualified under the prior thresholds, may continue to maintain their investments and make additional contributions without needing to meet the new, higher amounts.
The updated thresholds apply to new advisory relationships and new investors admitted on or after June 29, 2026. Advisers with pending closings or investors in the process of being admitted should evaluate whether transaction timing affects eligibility.
What Advisers Need to Update Before June 29, 2026
With the effective date less than a month away, advisers and fund managers should review their documentation and internal processes. Key items include subscription documents for Section 3(c)(1) funds, investment management agreements that reference specific dollar thresholds, investor questionnaires, compliance policies, and marketing materials.
Any document that currently states the $1.1 million assets-under-management threshold or the $2.2 million net worth threshold will be outdated after June 29. Documents that do not reference specific dollar amounts and instead rely on language like "as defined under Rule 205-3" may require less revision, but should still be reviewed in context.
Operations teams and fund administrators who handle investor onboarding should also be briefed so they apply the updated thresholds to new subscriptions from June 29 forward.
Why this Matters Beyond Compliance
For some advisers, raising the net worth threshold from $2.2 million to $2.7 million means a segment of their current investor pipeline may no longer qualify to participate in performance fee structures. That does not mean those investors are excluded from the fund altogether, but it does change the fee structure that can legally apply to them.
For firms in the process of launching a new fund or expanding their investor base, understanding who qualifies under the new thresholds is a practical due diligence step, not just a legal one. Advisers who charge performance fees to non-qualifying clients risk violating Section 205(a)(1) of the Advisers Act.
About this Briefing
This post is for informational purposes only and does not constitute legal or investment advice. For guidance specific to your fund structure or advisory agreements, consult qualified legal counsel. Primary source: SEC Release No. IA-6961, issued April 28, 2026.
Korevia Advisory Group helps businesses and advisory firms understand the regulatory and strategic context of doing business in the United States. Learn more at koreviagroup.com.
