Summary: The U.S. Securities and Exchange Commission (SEC) has proposed updating the financial thresholds that define a “qualified client” for performance-based advisory fees to reflect inflation. In this article, Aprio unpacks this change and how it impacts advisers charging fees based on capital appreciation under Rule 205-3 of the Investment Advisers Act.
On March 27, 2026, the U.S. Securities and Exchange Commission (SEC) issued a Notice of Intent to Issue an Order that would adjust for inflation the dollar thresholds used to determine whether a client qualifies to pay performancebased advisory fees under Rule 2053 of the Investment Advisers Act of 1940.
If these changes are finalized, they would affect registered investment advisers (RIAs) that charge incentive fees, carried interest, or other compensation based on capital appreciation.
Key Background
Section 205(a)(1) of the Investment Advisers Act generally prohibits advisers from charging fees based on a share of capital gains or capital appreciation. Rule 2053 provides an exception, allowing performancebased fees only when the client is a “qualified client.”
The SEC is required to adjust the qualified client thresholds approximately every five years to reflect inflation, using a specified federal inflation index.
Proposed Adjustments to Qualified Client Thresholds
The SEC’s notice states that it intends to issue an order increasing the minimum financial thresholds as follows:
- AssetsUnderManagement Test: Increase from $1.1 million to $1.4 million under management with the adviser immediately after entering the advisory contract
- Net Worth Test: Increase from $2.2 million to $2.7 million, excluding the value of the client’s primary residence and certain related debt
These thresholds determine whether an adviser may legally enter, extend, or perform a performancebased advisory contract with a client.
Timing and Process
There are a few considerations to keep in mind regarding the notice:
- The SEC has issued a notice of intent, not a final order
- Hearing requests must be submitted to the SEC by April 27, 2026
- If the SEC issues the order as described, it is expected to become effective approximately 60 days after the order date
Applicability and Transition Considerations
According to the notice, the updated thresholds generally would not apply retroactively to advisory relationships entered before the effective date, although transition issues would remain subject to Rule 2053.
For certain pooled investment vehicles, including private funds that rely on Section 3(c)(1) of the Investment Company Act, advisers are required to look through to underlying investors to determine whether each investor meets the qualified client standard.
Final Thoughts
Aprio views this proposed adjustment as a routine, yet meaningful inflation update that may nonetheless have material implications for advisers that rely on performancebased compensation structures.
Advisers should consider evaluating:
- Existing advisory and fund documents that reference qualified client thresholds
- Client onboarding and investor eligibility procedures
- The impact on prospective clients and new investors entering after the effective date
While existing arrangements may be grandfathered, advisers should be prepared to apply the updated thresholds to new clients, new investors, and certain contractual amendments once the order becomes effective.