WASHINGTON (CN) -The Securities and Exchange Commission proposes to raise the threshold for two tests used to determine if an investment advisor can charge for a percentage the capital gains of a client's portfolio rather than charge a flat fee.
The Investment Advisors Act of 1940 generally forbids investment advisors from being compensated based on any gains from their management of a client's portfolio.
In 1985, Congress amended the act to allow advisors to charge performance fees for "qualified investors" -those who had at least $500,000 under management with the adviser or had a net worth in excess of $1 million. The test thresholds were adjusted in 1998 to $750,000 and $1.5 million, respectively.
The new thresholds proposed by the SEC are $1 million for the assets-under-management test and $2 million for the net worth test.
The Dodd-Frank Wall Street Reform and Consumer Protection Act required the SEC to revise the thresholds by July 21 of this year.
Under the act, the SEC is required to review the test thresholds every five years to reflect the impact of inflation. Dodd-Frank also requires that the value of an investor's primary residence be excluded from the net worth test due to the bubble in home housing prices.
The SEC will accept public comment on the proposed thresholds until July 11.
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