The SEC has increased the net worth test threshold applied to “qualified clients” to $2.1 million. Qualified clients that enter into advisory contracts in reliance on the net worth test prior to the effective date will be “grandfathered” in, under the prior net worth threshold. The new requirement is effective August 15, 2016.
The SEC release states:
For purposes of rule 205-3(d)(1)(i) under the Investment Advisers Act of 1940 [17 CFR 275.205-3(d)(1)], a qualified client means a natural person who, or a company that, immediately after entering into the contract has at least $1,000,000 under the management of the investment adviser (the “assets under management test”); and
For purposes of rule 205-3(d)(1)(ii)(A) under the Investment Advisers Act of 1940 [17 CFR 275.205-3(d)(1)(ii)(A)], a qualified client means a natural person who, or a company that, the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $2,100,000 (the “net worth test”). The SEC will ratchet this amount up from time-to-time.
What You Should Do:
- Review your policies and subscription forms and update the definition of a “qualified client” to reflect the new rule
- Examine and update your due diligence procedures for onboarding new clients to ensure they have the correct fee structure
How Oyster Can Help:
Oyster Consulting helps our clients keep up with the ever changing regulatory requirements. Oyster Consulting provides comprehensive solutions for financial services conducted by consultants who have sat in your seat, facing the same obstacles and regulatory scrutiny. Oyster can help you implement change through consulting, support staffing, or outsourcing. We also provide training to your team to ensure they are aware of their responsibilities.