WASHINGTON (CN) -The Securities and Exchange Commission raised the threshold for two tests used to determine if an investment advisor may charge a percentage of 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 adopted by the SEC are $1 million for the assets-under-management test and $2 million for the net worth test.
Under Dodd-Frank Wall Street Reform and Consumer Protection 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 new thresholds are effective May 22.
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.