SEC Adopts Final Rules On Advisory Performance Fees

On February 15, 2012, the Securities and Exchange Commission ("SEC") adopted amendments to Rule 205-3 under the Investment Advisers Act of 1940 (the "Advisers Act"), which governs the manner in which investment advisers may enter into a performance-based compensation arrangement with their clients.¹ Specifically, Rule 205-3 allows an investment adviser to enter into such arrangement only with those clients that come within the definition of a "qualified client." Prior to the amendments, a "qualified client" includes, among other things, (i) a client that immediately after entering into a contract with an investment adviser has at least $750,000 under management with such investment adviser (the "AUM Test"); or (ii) a client that the investment adviser reasonably believes has a net worth of more than $1.5 million at the time the advisory contract is entered into (the "Net Worth Test"). The amendments to Rule 205-3 revise the qualified client definition by increasing the