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PERSONAL FINANCIAL PLANNING

SEC changes performance fee thresholds, net worth calculation

 

By Ken Tysiac
February 16, 2012

Investors no longer will include the value of their home in the net worth calculation that can determine whether registered investment advisers can charge them performance fees, the SEC announced Wednesday.

SEC rules allow registered investment advisers to charge performance fees if the client’s assets managed by the adviser or the client’s net worth meets certain thresholds.

Previously, investors with $750,000 in assets managed by an adviser or with a net worth of $1 million were eligible to be charged performance fees.

The revision raises those thresholds and removes the client’s primary residence and certain property-related debts from the net worth calculation.

Under the revised rules, clients must have at least $1 million in assets under management with the adviser or a net worth of at least $2 million to be deemed qualified to be charged a performance fee.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, P.L. 111-203, required the thresholds to be raised. The Dodd-Frank Act did not require investors’ homes to be excluded from the net worth calculation, but doing so was consistent with changes the SEC announced in December. Those changes removed the value of an investor’s primary residence from the net worth calculation for investors to be considered “accredited” or eligible to participate in certain unregistered securities offerings.

Under a grandfather provision to the performance fee rule, registered investment advisers will be able to continue to charge fees to investors who were considered qualified for fees before the rules changed. Newly registering investment advisers also will be allowed to continue charging performance fees to investors who already were paying them such fees.

As required by the Dodd-Frank Act, inflation adjustments will be made every five years to the thresholds that determine whether investors qualify to be charged fees. The rules changes will take effect 90 days after they are published in the Federal Register, but the investment advisers may use the grandfather provisions before then.

Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.

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