SEC Increases Qualified Client Threshold for RIA Performance Fees

As of June 29, 2026, the federal definition of “qualified client” has been changed to raise the “Net Worth Test” threshold from $2,200,000 to $2,700,000. 

Issued on April 28, 2026, by Order of the U.S. Securities and Exchange Commission (“SEC”) (Release No. IA-6961), the change represents an increase of nearly twenty-three percent (23%) to the Net Worth Test. The “Assets Under Management Test” threshold was also raised from $1,100,000 to $1,400,000, which represents an increase of twenty-seven percent (27%). 

Many states follow the same framework for the performance-based fee exemption and expressly incorporate the SEC’s qualified client definition into the state’s own analysis. Where they do, the federal Order may directly affect state-registered investment adviser (RIA) firms—with no legislative or administrative action needed at the state level. 

These adjustments are important because the Investment Advisers Act of 1940 (“Advisers Act”) generally prohibits an adviser from receiving performance-based fees—compensation based on a share of capital gains on or capital appreciation of a client’s account—but Rule 205-3 carves out an exemption from this prohibition for qualified clients.  

In general, a “qualified client” satisfies one of the following tests: 

• Assets Under Management (AUM) Test: a natural person or company who immediately after entering into such agreement has at least $1,400,000 under the management of the investment adviser. 

• Net Worth Test: a natural person or company who the adviser reasonably believes immediately prior to entering into the contract: (A) has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $2,700,000, excluding the value of the client’s primary residence and, subject to the limits in Rule 205-3, indebtedness secured by that residence; or (B) is a qualified purchaser as defined in Section 2(a)(51)(A) of the Investment Company Act of 1940. 

• Bona Fide Employee Test: a natural person who immediately prior to entering into the contract is: (A) An executive officer, director, trustee, general partner, or person serving in similar capacity of the investment adviser; or (B) An employee of the investment adviser (other than an employee performing solely clerical, secretarial, or administrative functions with regard to the investment adviser), who has participated in the adviser’s investment activities for at least 12 months. 

Per the Advisers Act and the Dodd-Frank Act, both the Net Worth Test and the AUM Test are updated every five (5) years to account for inflation based on the U.S. Department of Commerce’s Personal Consumption Expenditures Chain-Type Price Index (more commonly referred to as the PCE price index). Any revisions to the dollar amount under these two tests are rounded to the nearest $100,000 and are based on inflation from 2021 to the end of 2025. 

Although these threshold increases are relatively large compared to prior increases, for many RIA firms, these increases will not make much difference when assessing whether a client can be charged a performance-based fee because: 

1. The net worth of most prospective clients will either (i) easily fall below or (ii) easily surpass the new threshold. 
2. The Bona Fide Employee Test remains unchanged. 
3. The increased net worth threshold will not generally affect agreements in place before June 29, 2026. 
4. Note: If a person not covered by the agreement becomes a party to an agreement already in place before June 29, 2026, then the increased net worth threshold will apply to that new party (natural person or company). 
5. Most RIA firms do not offer a performance-based fee structure. 

That said, any adviser that offers a performance-based fee structure at all—whether under the Net Worth qualification or otherwise, and regardless of whether any client actually pays such a fee—should confirm that all documentation regarding the qualified client definition is properly updated. This would include, among other things, fund offering documents, investment advisory agreements for separately managed accounts, investor/client assessment or intake forms, compliance policies and procedures, training materials, marketing materials, and Form ADV. 

For additional details, please consult the full text of the SEC Order: Release No. IA-6961.  

Investment advisers with questions about how these changes—or performance-based fee arrangements generally—may affect their practice are encouraged to contact us.