In an order dated June 14, 2016, the Securities and Exchange Commission (SEC) adopted its prior proposal to increase the net worth threshold for “qualified clients” under Rule 205-3 of the Investment Advisers Act of 1940 (the Advisers Act) from $2 million to $2.1 million. This adjustment is being made pursuant to a five-year indexing adjustment required by §205(e) of the Advisers Act.
SEC Announces Settlement with Adviser Found to Have Acted as an Unregistered Broker
The SEC is continuing its pattern of establishing “standards of conduct” for the private equity industry through speeches, enforcement actions, and public settlements. After foreshadowing its concerns in various speeches over the last three years, the SEC recently returned its attention to the “unregistered broker” issue. In a settlement announced last week, the SEC asserted that a private equity manager was acting as an “unregistered broker” in connection with certain portfolio company transactions. Based on this publicly announced settlement, private equity fund managers should evaluate carefully whether the nature of services that they may provide, and the compensation that they may receive, related to portfolio company transactions may give rise to an obligation to register as a “broker.”
Application of the Joint Proposed Incentive Compensation Rule to Investment Advisers
On May 16, 2016, six federal agencies issued a joint release inviting public comment on a proposed rule to prohibit or condition certain incentive-based compensation arrangements. This proposed rule was mandated by section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and is a revision of the proposed rule the agencies previously published in the Federal Register on April 14, 2011.
As one of the six agencies, the U.S. Securities and Exchange Commission (SEC), is seeking to apply the rule to covered institutions with average total consolidated assets greater than or equal to $1 billion that offer incentive-based compensation to covered persons. By its terms, the definition of “covered financial institution” in section 956 of Dodd-Frank includes any institution that meets the definition of “investment adviser” under the Investment Advisers Act of 1940, as amended (the Advisers Act), regardless of whether the institution is registered, or exempted or prohibited from registration, as an investment adviser under the Advisers Act.
SEC Proposes Higher Net Worth Threshold for Qualified Clients under the Advisers Act
On Wednesday, May 18, 2016, the U.S. Securities and Exchange Commission (SEC) proposed to increase the net worth threshold for qualified clients from $2 million to $2.1 million. This proposed adjustment is being made pursuant to a five-year indexing adjustment required by §205(e) of the Investment Advisers Act of 1940 (the Advisers Act), as amended by §418 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
Investment advisers registered with the SEC are prohibited by §205(a)(1) of the Advisers Act from entering into, extending, or renewing any advisory contract which provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client (e.g. a performance-based fee like carried interest). An exemption from this prohibition is provided by Rule 205-3 under the Advisers Act for clients that meet the definition of a qualified client found in the rule.