SEC to Raise Qualified Client Threshold for Performance-Based Fees

May 4, 2026

What Happened?

The SEC issued a notice of intent that would adjust for inflation the dollar amount thresholds under the Investment Advisers Act that permit investment advisers to charge performance-based fees to “qualified clients.” Under the rule, an investment adviser may charge performance-based fees if a “qualified client” has a certain minimum net worth or a minimum dollar amount of assets under management with the adviser. Since amendments in 2011, these minimums have been set to update every 5 years.

Past updates in June of 2016 and June of 2021 pushed the thresholds higher to reflect inflation. A 2026 adjustment is now expected, which will impact private funds relying on 3(c)(1) and advisers to high-net-worth clients that are charged performance-based fees.

Qualified Clients and Performance-Based Fees

Qualified clients are authorized to be charged performance-based fees, such as performance fees, incentive fees, or carried interest. A “qualified client” is defined by two financial tests, which the SEC is seeking to change this year:

• The Net Worth Test: The adviser must reasonably believe that the client has a net worth above the minimum threshold, excluding the value of the primary residence, prior to entering into the advisory contract.
  • Current Minimum Net Worth = $1,100,000
  • New Minimum Net Worth = $1,400,000

• The Assets Under Management (“AUM”) Test: The client has at least the specific minimum dollar amount under management with the adviser prior to entering into the advisory contract.
  • Current Minimum Net Worth = $2,200,000
  • New Minimum Net Worth = $2,700,000

What does this mean for me?

Any existing advisory contracts executed before the change will be able to rely on the threshold at the time of signing.  However, after the SEC issues a final order, new clients and investors must meet the new thresholds on or after that order’s effective date. Review your compliance program for the following:

• Private Funds relying on the 3(c)(1) – Review private placement memoranda, limited partnership agreements, and related documentation for references to the old threshold. These will need to be updated for the new definition of qualified client. Depending on the timing of your offering, you may want to include both the old and new threshold amounts to accept new investors under the old amount before the effective date.
• Advisory Agreements – Similar to private funds, confirm any references to qualified client status in your advisory agreements and contracts that need to be revised to the applicable threshold on the effective date.
• Eligibility Forms – Make sure suitability and eligibility questions in agreements, questionnaires, side letter representations, etc., are updated for any reference to qualified client threshold amounts.
• New Procedures – Consider new procedures for operations and in conjunction with fund administrators to track prospective clients and investors. First, separate those signing before the effective date that can use the old threshold, and those signing on or after the effective date and must use the new threshold. Then, flag any clients and investors that need to complete new eligibility documentation or make updated qualified client representations.

This change will be an easy area for SEC Examiners–and for their software tools– to discover deficient agreements that apply outdated minimum net worth or minimum AUM thresholds. Under Atkins, the focus on fees and investor harm means the correct application of these thresholds will be paramount for any firm that charges performance-based fees.

We will continue to monitor new developments that impact investment advisers and compliance programs. If you have questions, contact us. Fairview is here to help.