A qualified client is an investor who meets specific financial thresholds under SEC Rule 205-3, allowing an investment adviser to charge performance-based compensation (carried interest) on their capital.
Why It Matters
Most fund managers charge both a management fee and a performance allocation. The performance allocation is a form of performance-based compensation, which the Investment Advisers Act restricts. Without qualified client status for each investor, charging carried interest violates federal law. This classification directly affects how your fund structures its economics.
Key Details
- Net worth test: $2,200,000 or more (this threshold is adjusted periodically for inflation by the SEC).
- Assets under management test: $1,100,000 or more under management with the adviser.
- Without qualified client status, charging performance fees violates the Investment Advisers Act.
- All qualified purchasers are typically qualified clients, but not all qualified clients are qualified purchasers.
- The thresholds apply at the time of entering into the advisory contract.
For more, see Accredited Investor vs. Qualified Purchaser vs. Qualified Client.
Capital Company handles investor qualification tracking and fee structure compliance as part of fund administration.
This content is for informational purposes only and does not constitute legal, tax, or compliance advice. Consult qualified counsel for guidance specific to your situation.