United States: SEC’s Updated Qualified Client Standards Take Effect 29 June 2026

By: Sasha Burstein, Pablo J. Man, Mark T. Heine, Edward T. Dartley, and George Zornada

The United States Securities and Exchange Commission’s (SEC) inflation adjustment to the qualified client thresholds under Rule 205-3 of the Investment Advisers Act of 1940 will become effective on 29 June 2026, and will carry important implications for SEC-registered investment advisers (RIAs) that charge performance-based compensation tied to capital gains or investment appreciation.

Under the revised thresholds, a client or private fund investor must satisfy one of the following tests for an RIA to charge performance fees:

• At least US$1.4 million in assets under management with the adviser immediately after entering into the advisory relationship (increased from US$1.1 million); or
• A net worth exceeding US$2.7 million, excluding the value of the individual’s primary residence and certain related debt (increased from US$2.2 million)

The SEC is required to adjust these thresholds for inflation every five years. The updated standards apply only to advisory contracts and private fund subscriptions entered into on or after 29 June 2026, while existing clients and investors generally remain grandfathered under the prior thresholds. The amendments also do not affect investors already deemed to be qualified clients, including certain knowledgeable employees, executive officers and qualified purchasers.

The updated thresholds are particularly relevant for advisers managing Section 3(c)(1) private funds, certain separately managed accounts, and registered fund structures that charge performance-based fees on gains, including interval funds, tender offer funds, and certain BDC structures. Advisers with ongoing fundraising processes, evergreen vehicles or anticipated closings after 29 June 2026, should begin evaluating the operational and documentation impacts.

In advance of the effective date, advisers should consider updating subscription agreements, investor questionnaires, transfer documentation, separately managed account agreements, compliance policies and onboarding procedures that reference the current qualified client standards. The changes may also have implications under certain state regulatory regimes, including state-level private fund adviser exemptions that require all investors to qualify as qualified clients, even where no performance fee is charged, as well as state rules governing carried interest and other incentive-based compensation.