Exam Alert: NASAA revises qualified client standard

Effective April 15, 2013, NASAA revised its model rules specifying who was considered a “qualified client.” The changes bring the rules in line with changes made to federal rules. Continue reading

Effective April 15, 2013, NASAA revised its model rules specifying who is considered a “qualified client.” A qualified client may enter into a performance-based compensation arrangement with an investment adviser.

The changes bring the rules in line with changes made to federal rules (updates on those changes can be found here).

The changes are as follows:

-Clarifies that advisers that are exempt from registration may charge performance-based fees.

-Ties the definition of a qualified client to the definition provided by the federal rule. The standard is currently $1 million in assets under management with the adviser or $2 million in net worth, excluding the value of the client’s primary residence. These amounts will be adjusted for inflation every five years.

-Clarifies that an investor in a private fund must be a qualified client in order for an adviser to charge them performance-based fees. An adviser cannot simply consider the fund itself a “qualified client” in order to charge the investors performance-based fees. If a fund consists of both qualified and non-qualified clients, the adviser may only charge performance-based fees to the qualified clients.

-Put transitional rules into place so that if the rules change, existing contracts will not suddenly be in violation of the new rules. The contract must be in compliance with the rules as of the last time it was entered into, extended, or otherwise renewed.

 

Sources: Model Rule 102(f)-3

Notice of Request for Public Comment: Proposed Changes to Performance Fee Model Rules Under the Uniform Securities Acts of 1956 and 2002

This alert applies to the Series 63, Series 65, and Series 66.

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