The Securities and Exchange Commission has adopted final rules that raise two of the thresholds that determine whether an investment adviser can charge performance fees.

Under the Investment Advisors Act, an investment adviser generally cannot accept compensation based on a share of the capital gains of a client's funds—what's known as performance compensation or performance fees. Certain circumstances do allow for an exemption, however, such as when the client's assets under management top a certain level, or the client's net worth exceeds a certain amount.

Under the SEC's final rule, mandated by the Dodd-Frank Act, such an exemption comes into play if the client's assets under management are at least $1 million, or if the adviser reasonably believes the client's net worth is more than $2 million. Under the old thresholds, which had been in place since 1998, the client's assets under management had to be at least $750,000, or $1.5 million in net worth.

The SEC deems investors who meet the net worth or asset threshold as “qualified clients” able to bear the risks associated with performance fee arrangements.

The new rule also prevents investment advisers from using a client's primary residence and certain property-related debts from the net worth calculation. While not required by the Dodd-Frank Act, the change is consistent with SEC changes approved in December to net worth calculations for determining who is an “accredited investor” eligible to invest in certain unregistered securities offerings.

A new grandfather provision to the performance fee rule permits registered investment advisers to continue to charge clients performance fees if the clients were considered “qualified clients” before the rule changes. In addition, the grandfather provision will permit newly registering investment advisers to continue charging performance fees to those clients they were already charging performance fees.

Also required by the Dodd-Frank Act, adjustments to the dollar thresholds will be made every five years.

The changes will take effect 90 days after publication in the Federal Register, which is expected to occur any day now.