The Securities and Exchange Commission (the "SEC") has adopted amendments to the Investment Advisers Act of 1940 (the "Advisers Act") to provide greater flexibility for performance fee arrangements for sophisticated clients of SEC registered investment advisers. The amendments are effective for contracts entered into, renewed or extended on or after August 20, 1998.
Rule 2053 of the Advisers Act currently permits a registered adviser to enter into a performance fee arrangement with respect to securities only if a number of requirements are satisfied, including (1) the client must have under the management of the adviser at least $500,000 or a net worth that exceeds $1 million; (2) the compensation must be paid under a formula that generally takes into account unrealized capital losses of marketable securities, includes unrealized depreciation if unrealized appreciation is included, and is based on net gains over a period of not less than one year; (3) the client must be provided
