Read
2 minute read
July 27, 2026
2 minute read
On April 28, 2026, the SEC issued a final order adjusting the thresholds of the "qualified client" definition under Rule 205-3 of the Investment Advisers Act of 1940. The adjustment took effect June 29, 2026. See the SEC's fact sheet here: Fact Sheet for Performance-Based Investment Advisory Fees Final Rule
Qualified Client Thresholds
Although there are many ways a person can fall within the definition of a qualified client, the most common is based on their AUM or net worth. As indicated below, the SEC is raising the thresholds at which a person's AUM or net worth makes them a qualified client.
| Test | Prior Threshold | New Threshold |
|---|---|---|
| Assets Under Management with the adviser | $1.1 million | $1.4 million |
| Net Worth (including spousal assets; excluding primary residence and related debt) | $2.2 million | $2.7 million |
Implications
SEC-registered investment advisers cannot charge performance-based fees (e.g., carried interest) to a client or investor unless that person is a qualified client. Additionally, many state registration exemptions available to private fund advisers require that all investors fall under the definition of a qualified client, or impose significant burdens if the fund accepts non-qualified clients.
As a result, private funds will need to ensure they use the new definition of qualified client from June 29, 2026, onwards for purposes of determining who may invest in the fund and who may be charged a carried interest.
Action Items
- Update PPMs, subscription documents, and investor questionnaires for 3(c)(1) funds to reflect the new thresholds.
- Assess timing of pending closings and LP transfers as closings before June 29 can still rely on the current thresholds.
- Refresh compliance policies and procedures referencing the qualified client standard.
Michael Best has attorneys who can assist firms in navigating complex compliance and private fund matters. Please reach out if you have any questions.
