On August 16, 2021, the financial thresholds specified in the
definition of "qualified client" under Rule 205-3 of the
Investment Advisers Act of 1940 ("Advisers Act") will
increase (i) from $1 million to $1.1 million (assets under
management test), and (ii) from $2.1 million to $2.2 million (net
worth test). Contracts entered into prior to August 16, 2021 will
be "grandfathered" in and will not be subject to the
adjusted dollar amounts, unless a client who was not a party to
such contract becomes a party following this effective date.
Investment advisers and fund managers should consider whether their
agreements must be updated to reflect the new thresholds.
Section 205(a)(1) of the Advisers Act generally prohibits
investment advisory contracts that provide for compensation to an
investment adviser that is based on a share of capital gains on, or
capital appreciation of, the funds of a client. However, Rule 205-3
of the Advisers Act provides a limited exemption from
