Beginning on June 29, 2026 (the “Effective Date”), SEC-registered investment advisers charging performance-based fees (e.g. carried interest or performance allocation) and in certain cases exempt reporting advisers[1] (collectively, “Advisers”) must ensure that clients or private fund investors (“Investors”) meet updated “qualified client” thresholds under Section 205-3 of the Investment Advisers Act of 1940 (the “Advisers Act”). In April 2026, the SEC issued a final order that adjusts these dollar thresholds to account for inflation, affecting fee arrangements for many investment advisory relationships. Section 205(a)(1) of the Advisers Act generally prohibits investment advisers from entering into advisory contracts that compensate Advisers with performance-based fees based on a share of capital gains unless their Investors qualify as a “qualified client” under the Advisers Act.
Definition of Qualified Client
Prior to the Effective Date, to be a qualified client, each Investor (whether a natural person or entity) must satisfy at least one of the following criteria under Section 205-3 of the Advisers Act:
- Assets-Under-Management Test: The Investor maintains at least $1.1 million in assets under management with the Adviser as of the advisory contract’s effective date.
- Net-Worth Test: The Investor has a net worth exceeding $2.2 million (together with assets held jointly with a spouse, but excluding the value of the Investor’s primary residence and related debt) at the time the advisory arrangement commences.
- Qualified Purchaser or Knowledgeable Employee Status: The Investor is a “qualified purchaser” as defined in Section 2(a)(51) of the Investment Company Act of 1940 (the “Investment Company Act”) or a “knowledgeable employee” of the Adviser under Rule 3c-5 of the Investment Company Act.
SEC Inflation-Adjusted Definition of Qualified Client (Effective June 29, 2026)
Effective from June 29, 2026, to be a qualified client, each Investor (whether a natural person or entity) must satisfy at least one of the following criteria:
- Assets-Under-Management Test: The Investor maintains at least $1.4 million in assets under management with the Adviser as of the advisory contract’s effective date.
- Net-Worth Test: The Investor has a net worth exceeding $2.7 million (together with assets held jointly with a spouse, but excluding the value of the Investor’s primary residence and related debt) at the time the advisory arrangement commences.
- Qualified Purchaser or Knowledgeable Employee Status: The Investor is a “qualified purchaser” as defined in Section 2(a)(51) of the Investment Company Act or a “knowledgeable employee” of the Adviser under Rule 3c-5 of the Investment Company Act.
Existing Advisory Relationships
The revised thresholds apply only to advisory contracts entered into or renewed on or after June 29, 2026. Specifically, Advisers entering into new investment management agreements or subscription agreements (or consenting to any transfer agreements) on or after the Effective Date. Importantly, existing advisory contracts established prior to June 29, 2026, may continue to rely on the former thresholds, even if they would not qualify under the new thresholds, but an existing Investor who or which desires to make an additional subscription after the Effective Date must satisfy the new thresholds at the time of such additional subscription. Advisers should carefully evaluate whether any existing relationships involve automatic renewal or amendment provisions that might trigger application of the new thresholds.
Compliance Considerations
To ensure compliance with the new thresholds, Advisers should undertake the following measures, including but not limited to:
- Amend Documentation: Revise subscription agreements, transfer agreements, and investment management agreements to reflect the updated qualified client thresholds for any advisory relationships that will commence on or after June 29, 2026.
- Assess Timing: Evaluate the timing of upcoming advisory contracts, fund closings, and Investor admissions to determine which threshold will apply.
- Strengthen Compliance Procedures: Implement or update internal compliance procedures to monitor and document qualified client determinations.
- Train Personnel: Provide compliance and investment staff with comprehensive training on the revised requirements and their implementation.
Contacts:
Jarrod Azopardi I 817.420.8241 I jazopardi@winstead.com
Burke McDavid I 214.745.5490 I bmcdavid@winstead.com
Andrew Rosell I 817.420.8261 I arosell@winstead.com
Misha Checkovich I 214.745.5170 I mcheckovich@winstead.com
Darby Strickland Fries I 214.745.5291 I dfries@winstead.com
[1] For example, if a private fund adviser has filed as an exempt reporting adviser with the Texas State Securities Board and the adviser manages a 3(c)(1) hedge fund or another type of fund that is not a private equity, real estate or venture capital fund, then the 3(c)(1) fund’s outstanding securities must be beneficially owned entirely by persons who each meet the definition of a qualified client in SEC Rule 205-3 when the securities are purchased from the fund.