QUALIFIED CLIENTSSEC registered (and many state registered) hedge fund managers can charge a performance fee (also referred to as an incentive allocation or performance allocation) only to qualified clients. The performance fee cannot be charged to accredited or non accredited investors. The U.S. Securities and Exchange Commission (sec) issued an Order raising the “net worth test” from $2.1 million to $2.2 million and raising the “assets under management test” from $1 million to $1.1 million for purposes of the “qualified client” definition in Rule 205-3 under the Investment Advisers Act of 1940. This thresholds has been effective since August 16, 2021, and registered investment advisers charging performance-based compensation should timely revise their fund or client documentation accordingly.
To qualify as a “qualified client” on or after the August 16, 2021, effective date, a natural person or company must:
have at least $1.1 million of assets under management with the adviser immediately after entering into the investment advisory contract with the adviser;
have a net worth (together, in the case of a client who is a natural person, with assets held jointly with a spouse) of more than $2.2 million (excluding the value of such natural person’s primary residence and indebtedness secured by such residence) immediately prior to entering into the contract;
be a “qualified purchaser” as defined in Section 2(a)(51)(A) of the Investment Company Act of 1940; or
be a “knowledgeable employee” of the adviser
The Order is important for determining which clients may pay an adviser a performance fee. Section 205(a)(1) of the Advisers Act prohibits an investment adviser registered with the SEC from entering into, extending or renewing any investment advisory contract which provides for compensation to the investment adviser on the basis of a share of capital gains on, or capital appreciation of, the funds of the client (e.g., carried interest or performance fees). Rule 205-3 under the Advisers Act provides an exemption from this prohibition if the client is a “qualified client.”
Additionally, an adviser that manages a private fund relying on Section 3(c)(1) of the Investment Company Act must “look through” the fund to determine the qualified client status of each fund investor and each equity owner of any fund investor that is: 1) an “investment company” registered under the Investment Company Act, 2) a private fund relying on Section 3(c)(1) of the Investment Company Act or 3) a “business development company” as defined in Section 202(a)(22) of the Advisers Act. This “look through” requirement does not apply to private funds relying on Section 3(c)(7) of the Investment Company Act.
New contractual relationships (e.g., subscription agreements or advisory agreements) entered into on or after the August 16, 2021, effective date must reflect the adjusted numbers. Registered investment advisers who manage private funds that rely on Section 3(c)(1) of the Investment Company Act or advise managed accounts and who receive performance-based compensation should ensure that agreements entered August 16, 2021, or later reflect the adjusted thresholds.
NEXT LAW CHANGE 2026 Section 418 of the Dodd-Frank Act and Advisers Act Rule 205-3 require the SEC to adjust the dollar amounts in these tests for inflation every five years, rounded to the nearest $100,000; the next adjustment is expected to be in 2026.
GRANDFATHERED QUALIFIED CLIENTS A grandfather provision to the performance fee rule permits registered investment advisors to continue to charge clients performance fees if the clients were considered “qualified clients” before the law change. It is unclear whether this would also extend to additional investments made by such clients or past subsequent law changes.
NEWLY REGISTERED ADVISERS If a previously exempt adviser subsequently registers with the SEC, the new thresholds would not apply to contracts entered into prior to registration. It is unclear whether this would also extend to additional investments made by such clients or past subsequent law changes.
PRIMARY RESIDENCE EXCLUSION A person's primary residence shall not be included as an asset. Indebtedness that is secured by the primary residence (i.e. a mortgage or home equity loan), up to the estimated fair market value of the primary residence shall not be included as a liability, unless indebtedness was incurred less than 60 days prior to the purchase of the securities; and indebtedness that is secured by the person's primary residence that is in excess of the fair market value of the residence shall be included as a liability. There is a 60-day look-back rule for any indebtedness incurred on the primary residence to discourage people from borrowing against their homes in order to qualify as a qualified client. Consequently, any investor who converts home equity, which otherwise is excluded, into cash or other assets must exclude this indebtedness as if it was incurred within 60 days of purchasing the securities. The look-back period is intended to make it more difficult for advisers to encourage investors to manipulate their net worth by borrowing against their primary residence.
PRIOR LAW EFFECT Prior to August 16, 2021 a qualified client was defined as
1. A natural person who or a company that has at least $1,000,000 under the management of the investment adviser; or 2. A natural person who or a company that the investment adviser reasonably believes has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $ 2,000,000.
Earlier in history, a qualified client was defined as an investor that: (i) had at least $750,000 in AUM with the RIA that held the advisory contract; or (ii) has a net worth of more than $1.5 million.
STATE INVESTMENT ADVISERSMany states (such as California, Pennsylvania, etc...) follow SEC rules. As a result, even if your investment adviser firm is state registered (versus SEC registered), the definition of qualified client will affect you if your state follows federal law. Some U.S. states do not follow federal law and may still have in effect an older definition of a qualified client. Check state law before charging performance fees. Some states do not update their statute but effect law changes through administrative orders. Each state appears to have its own twist. Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 Under the Investment Advisors Act of 1940
SUBSCRIPTION AGREEMENT & THE QUALIFIED CLIENT Below are the Qualified Client categories:
Individual or Company with Net Worth In Excess of $2 Million. A natural person or company whose net worth (or, in the case of a natural person, joint net worth with his or her spouse) at the time of entering into this Agreement exceeds $2,000,000. Explanation: In calculating net worth, you may include your equity in personal property and real estate, including your principal residence, cash, short-term investments, stock and securities. Your inclusion of equity in personal property and real estate should be based on the fair market value of such property less debt secured by such property.
or
Individual or Company with $1,000,000 under Management. A natural person or company who has at least $1,000,000 under the management of the General Partner immediately after entering into this Agreement.
or
Individual or Company who is a Qualified Purchaser under 1940 Act. A natural person or company who is a qualified purchaser as defined in Section 2(a)(51)(A) of the 1940 Act at the time of entering into this Agreement.
or
Executive Officer, Director, Partner etc. of General Partner. A natural person who is an executive officer, director, trustee, general partner, or person serving in a similar capacity, of the General Partner.
or
Employee of General Partner. A natural person who is an employee of the General Partner (other than an employee performing solely clerical, secretarial or administrative functions with regard to the General Partner) who, in connection with his or her regular functions or duties, participates in the investment activities of the General Partner, provided that such employee has been performing such functions and duties for or on behalf of the General Partner, or substantially similar functions or duties for or on behalf of another company, for at least 12 months.
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Ms. Terhune's credentials reflect an invaluable resource that combines a well-informed professional practitioner with sound ethical judgment that cannot be over-estimated. After reading our many leading articles and web content, you will probably have questions for us. The best way to get quick answers to your specific questions is to speak directly to one of our leading attorneys. When you buy a 30 or 60 minute consultation, we contact you quickly to schedule. Most of our clients begin with a consultation by phone and then use email to follow up. The expertise required to recommend best solutions and provide sound advice should never be taken lightly.
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ARE YOU AFRAID OF WHAT YOU DO NOT KNOW? Get answers to your specific questions by speaking directly to Hannah Terhune, an experienced hedge fund and international tax attorney. Ms. Terhune's hard-earned knowledge and experience can be utilized, as a tool, to save you unnecessary steps and costly wasted effort. The consultation is an invaluable opportunity to speak to Hannah one-on-one and learn how to achieve more in less time. As a result, you can anticipate that the return on your investment will far outweigh the costs associated with our unsurpassed services. Ms. Terhune's credentials reflect an invaluable resource that combines a well-informed professional practitioner with sound ethical judgment that Is unparalleled in the industry. The expertise required to recommend the best solutions and provide sound advice should never be taken lightly. When you are finished with your consultation, you will be both impressed and informed about your business plans. Contact Hannah Terhune now!
We have both regulatory experience and the understanding of the foreign exchange and securities markets. Each client receives personalized attention from our attorneys and staff. No client is too large or small though because of our boutique size. We pride ourselves in providing personal attention to each client. CMSG provides the best services and support needed for hedge funds and business projects. No need to coordinate work between different firms--we handle the entire business process from start to finish. We offer accounting, tax planning services, tax return preparation, business consulting, and U.S. and international company formation services. Our professionals provide the highest quality services at competitive rates. But don't take our word for it, give us a call and let us prove what we can do for you. Read our Leading Media Articles, Customer Testimonials and learn more About Us.
WHY HIRE US? When you hire us for hedge fund you get a unique combination of securities, tax, and international experience, focused on the trader niche. We are one destination for special hedge fund and trader tax needs. We think we have the best set of offering documents based on the current and ever changing federal, state, and offshore securities, commodities, and tax laws. We aim to and deliver quick turnaround times.
We understand that clients want to begin business as soon as possible. We conceive, structure, and deploy the best strategies. Our customers value our one-stop shop relationship. We help you start your business and continue to assist you. Our tax services affiliate handles accounting, software, and tax compliance, including all tax matters (tax planning and tax returns). Only one thing counts with us and that is our customer relationships!
We are one destination for all your very special hedge fund and trader tax needs. We think we have the best set of offering documents based on the current and ever changing federal, state and offshore securities, commodities, and tax laws. We aim and deliver quick turnaround times, because we understand that our customers want to begin their money management business as soon as possible.
We conceive, structure, and deploy the best tax saving strategies into your hedge fund vehicle (for the benefit of the manager and their investors) and your management company. Investors value tax-savings strategies and we utilize all our special knowledge and ideas in this area. Our customers value our one-stop relationship. We will help you start your business and continue to assist you.
MEET ATTORNEY HANNAH M TERHUNE Hannah Terhune, a hedge fund and international tax attorney, contributes her expertise, experience and thoughts to many digital content media and magazine repositories. Hannah Terhune's articles are widely circulated on the Internet and recommended by TheStreet.com and other respected media. Hannah Terhune's articles will advance your knowledge and understanding of the industry. They are embraced worldwide as a definitive and reliable source of critical information. Contact Us for Articles & Reprint Rights
Strategic Hedge Fund Planning by Hannah Terhune. Wilmott Magazine Ltd. (Volume 2013, Issue 63, pages 8-11 January 2013).
Trading Foreign Index Contracts? Know the Tax Rules Before You Trade by Hannah M. Terhune and Roger D. Lorence. Stocks, Futures and Options (June 2005)
Advising Clients on Internet Server Co-Location Agreements, Practical International Tax Strategies (March 15, 2004)
Structuring and Financing International Operations Using Hybrid Entities and Tax-Efficient Financing. Practical International Tax Strategies (Jan. 15, 2004)
Tax-Free Asset Acquisitions – More Strategies for S-Corporations: Sourcing Income to Preserve the Use of Credits and Carryovers: Practical International Tax Strategies (April 15, 2003)
Reducing Operational and Exit Taxes On Closely-Held Businesses. Practical U.S./Domestic Tax Strategies (August 2003)
Coming Ashore – Establishing U.S. Operations: Practical International Tax Strategies (July 31, 2003)
Financing U.S. Business Operations Using Cross-Border Income Trust: Practical International Tax Strategies (July 15, 2003)
Methods of Compensating the Executive – An Overview of Various Tax Features: Practical U.S./Domestic Tax Strategies (May 2003)
Update on Spanish Holding Companies. Practical European Tax Strategies (Aug. 2003)
Outbounding Income from Intellectual Property, Practical International Tax Strategies (March 15, 2003)
Taxable Stock Purchases: More Planning Strategies for S-Corporations, Practical U.S./Domestic Tax Strategies (Feb. 2003)
Business Globalization: Selecting the Proper Offshore Entity, Practical International Tax Strategies (Feb. 15, 2003)
Taxable Acquisitions: Financing Asset Acquisitions When an S-Corporation is Involved. Practical U.S./Domestic Tax Strategies (January 2003)
International Joint Venture Partnerships: Foreign or Domestic, Practical International Tax Strategies (January 15, 2003)
Corporate-Level Penalty Taxes on S-Corporations – Transaction Costs in Mergers, Acquisitions and Buy-Outs. Practical U.S./Domestic Tax Strategies (December 2002)
Taxation of Foreign Partnership Income: Issues to Consider in Reviewing Foreign Operating Structures. Practical U.S./International Tax Strategies (Dec. 31, 2002)
The Future of European-Based Business Operations: A Look at the Tax Aspects of the Societas Europaea. Practical European Tax Strategies (November 2002)
Tax Planning for Multiple Corporations: Domestication of Foreign Corporations. Practical International Tax Strategies (Oct. 15, 2002)
Acquisition Techniques Using Partnerships or LLCs – Planning Strategies to Defer Taxable Gain. Practical U.S./Domestic Tax Strategies (Oct. 15, 2002)
Tax Planning for Multiple Corporations: Canadian and Mexican Contiguous Country Companies. Practical International Tax Strategies (Oct. 15, 2002)
Acquisition Techniques Using Partnerships or LLCs – Planning Strategies to Defer Taxable Gain. Practical U.S./Domestic Tax Strategies (Oct. 15, 2002)
Domestic and International Tax Planning for Multiple Corporations. Practical International Tax Strategies (Sept. 15, 2002)
Tax Benefits of Spanish Holding Companies: A Planning Opportunity for U.S. Companies. Practical International Tax Strategies (Aug. 31, 2002)
Key Tax Aspects of International M&A – Planning Scenarios Involving Tax Acquisitions. Practical International Tax Strategies (Sept. 15, 2003)
Corporate-Level Penalty Taxes on S-Corporations – Transaction Costs in Mergers, Acquisitions and Buy-Outs. Practical U.S./Domestic Tax Strategies (December 2002)
Taxation of Foreign Partnership Income: Issues to Consider in Reviewing Foreign Operating Structures. Practical International Tax Strategies (Dec. 31, 2002)
The Future of European-Based Business Operations: A Look at the Tax Aspects of the Societas Europaea. Practical European Tax Strategies (November 2002)
Shifting Intangible Income to an Offshore Company Part II: Sale or License? Practical International Tax Strategies (Sept. 15, 2001)
Shifting Intangible Income to an Offshore Company "Round Tripping" and the Risk of Bringing §956 into Play. Practical International Tax Strategies (Aug. 15, 2001)
Update on Filing Requirements for Transfers of Property Offshore. Practical International Tax Strategies (July 15, 2001)
Want a Multinational Corporation In Your Backyard? Strategic Tax Planning for Countries Without a Clue. Practical International Tax Strategies (June 15, 2001)
Planning Notes for U.S. Businesses Operating Overseas: U.S. Outbound Tax Issues. Practical International Tax Strategies (May 31, 2001)
U.S. Strategic Tax Planning and Other Modern Day X Files An FSA to Remember. Practical International Tax Strategies (May 15, 2001)
More on International Tax Planning for Highly Compensated Individuals Combining Individual Leasing Programs, Deferred Compensation and Rabbi Trusts. Practical U.S./International Tax Strategies (April 30, 2001)
International Tax Planning for Highly Compensated Individuals Taking Advantage of Special Treatment for "Rabbi Trusts." Practical U.S./International Tax Strategies (April 15, 2001)
More on Dealing with Passive Foreign Investment Companies Using Inter-Company Loans, Handling Start-Up Costs and Other Matters. Practical U.S./International Tax Strategies (March 31, 2001)
Dealing with Passive Foreign Investment Companies How the System Works and Strategies to Avoid PFIC Status. Practical U.S./International Tax Strategies (March 15, 2001)
Swiss Corporate Ventures, Inc. – Advantages of Establishing a Holding Company in Switzerland. Practical U.S./International Tax Strategies (Feb. 28, 2001)
Cost-Sharing Rules under IRS Attack, Part IV. Practical U.S./International Tax Strategies (Feb. 15, 2001)
International Tax 101. Practical U.S./International Tax Strategies (Jan. 31, 2001)
International Tax 101: More Cliff Notes to Cross-Border Business. Practical U.S./International Tax Strategies (Jan. 15, 2001)
Cost-Sharing Strategies Under Attack, Part III IRS Challenges to Cost-Sharing Arrangements. Practical U.S./International Tax Strategies (Dec. 15, 2000)
Cost-Sharing Strategies Under Attack, Part II, Transfer Pricing Rules and Cost-Sharing Arrangements. Practical U.S./International Tax Strategies (Nov. 30, 2000)
Cost-Sharing Strategies Under Attack How Transfer Pricing Rules Affect Cost-Sharing Arrangements. Practical U.S./International Tax Strategies (Nov. 15, 2000)
Dutch Tax Treats Use Them or Lose Them. Practical U.S./International Tax Strategies (Oct. 15, 2000)
Going Global? Go Home – Unless You're Prepared for the U.S. Tax Consequences. Practical U.S./International Tax Strategies (Sept. 30, 2000)
Commissionaire Use in Austria: Focus on a Commissionaire-Friendly Jurisdiction. Practical U.S./International Tax Strategies (Sept. 15, 2000)
Using Stripped Subsidiaries for Foreign Country Sales Another Alternative to the Traditional Buy-Sell Model. Practical U.S./International Tax Strategies (July 31, 2000)
Handling the IRS Corporate Tax Audit: In Defense of the U.S. Tax Director. Practical U.S./International Tax Strategies (June 30, 2000)
Avoiding Taxable Income by Managing CFC Guarantees of U.S. Parent Company Debt. Practical U.S./International Tax Strategies (June 15, 2000)
Tax Measures to Hedge Against the U.S. Equity Devolution. Practical U.S./International Tax Strategies (May 31, 2000)
Bringing Home the Bacon: Planning Strategies for Offshore Income, Part III. Practical U.S./International Tax Strategies (April 30, 2000)
Commissionaire Use in France: Vetting the VAT. Practical U.S./International Tax Strategies (April 15, 2000)
Bringing Home the Bacon: Planning Strategies for Offshore Income, Part II. Practical U.S./International Tax Strategies (March 31, 2000)
Bringing Home the Bacon: Planning Strategies for Offshore Income, Part I. Practical U.S./International Tax Strategies (March 15, 2000)
Commissionaire Use in Spain. Practical U.S./International Tax Strategies (Feb. 28, 2000)
Commissionaire Use in Belgium. Practical U.S./International Tax Strategies (Feb. 15, 2000)
Crafting the Cross-Border Contract: Foreign Taxes and the U.S. Foreign Tax Credit. Practical U.S./International Tax Strategies (Jan. 31, 2000)
Crafting the Cross-Border Contract: Structuring a Services Agreement. Practical U.S./International Tax Strategies (Jan. 15, 2000)
Crafting the Cross-Border Contract: Drafting to Obtain Sales or Business Profits Treatment. Practical U.S./International Tax Strategies (Dec. 15, 1999)
Crafting the Cross-Border Contract: Unbundling Show-How from Know-How. Practical U.S./International Tax Strategies (Nov. 30, 1999)
Managing the Cross-Border Payroll, Part II: Withholding and Reporting Obligations. Practical U.S./International Tax Strategies (Nov. 15, 1999)
Managing the Cross-Border Payroll, Part I: Overview of U.S. Payroll Taxes. Practical U.S./International Tax Strategies (Oct. 31, 1999)
Cutting Foreign Tax Costs Using Well Known, Multi-Jurisdictional Tax Planning Strategies. Practical U.S./International Tax Strategies (Oct. 15, 1999)
Structuring an International Joint Venture: Transferring Intangible Property and Other Assets. Practical U.S./International Tax Strategies (Sept. 30, 1999)
Integrating The Foreign Sales Corporation Into Commissionaire Distribution Operations. Practical U.S./International Tax Strategies (Sept. 15, 1999)
Using A Foreign Sales Corporation To Fund An Individual Retirement Account: Some Practical Examples. Practical U.S./International Tax Strategies (Sept. 15, 1999)
Integrating The Foreign Sales Corporation Into commissionaire Distribution Operations. Practical U.S./International Tax Strategies (Aug. 15, 1999)
Commissionaire Modeling for European Union Customer Sales. Practical U.S./International Tax Strategies (July 31, 1999)
Commissionaire Use in Japan. Practical U.S./International Tax Strategies (June 30, 1999)
Taking Charge of Foreign Profits Through Commissionaire Operations. Practical U.S./International Tax Strategies (June 15, 1999)
Final Regulations Clarify Cost-sharing of R&D Expenditures, The Tax Advisor (January 1997)
Employer Operated Eating Facilities, Journal of Compensation and Benefits (September 1990)
Capital Management Services Group, Inc. is an authority in the hedge fund industry. It is a forward-thinking law firm focused on creating long-term collaborative relationships with a select group of clients interested in the same. It strives to provide “high touch” service and perform a defined set of legal and other services with impeccable efficiency.
Offering Exceptional Care for a Select Few Capital Management Services Group is a small law firm catering to active investors, active traders, day traders, investment advisers and hedge funds worldwide. We offer comprehensive legal, tax and accounting services. We also offer hedge fund development services, small business planning, wealth preservation and wealth management services, and asset protection services. Our goal is to offer exceptional care for a select few.
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