The Securities and Exchange Commission proposed a rule yesterday under the Dodd-Frank Act that would adjust the threshold amounts for inflation that a "qualified client" must meet before an investment adviser can charge performance fees. The initial adjustment would take effect by July 21, and future changes would be made every five years.

Under the Investment Advisers Act, an adviser can charge for performance fees if he manages at least $750,000 of a client's assets and believes that the client's net worth is more than $1.5 million. The SEC proposes to raise the thresholds for charging the fee to $1 million under management and $2 million for net worth.

The SEC also proposed three further related amendments to the current rule. These would require the Commission to show the method for calculating inflation adjustments to exclude the client's primary residence in calculating net worth, and to take the time delay into account between when the thresholds are adjusted and when the advisory contract is signed.

Though the overall fees collected by advisers might be reduced since advisers would no longer be able to charge some clients performance fees, the Commission staff estimates that the amendments “are not likely to impose a significant net cost” on advisers, according to the 30-page document. “Because of the ability of investment advisers to attract qualified clients who satisfy the proposed standards, and the ability of non-qualified clients to invest in other investment opportunities that do not entail performance fees, we expect that the proposed rule would not have a significant impact on capital formation,” said Elizabeth Murphy, the Commission's secretary, in the proposal.

The public can request a hearing on the “dollar amount tests”—which include proposals regarding modifications to account for inflation—by writing to the Commission's secretary and explaining their interest, reason for the request, and the issues contested. These must be received by 5:30 p.m. on June 20.

The Commission is also accepting comments on the proposal through July 11.

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