SEC Raises Performance Fee Threshold for Investment Advisers; CFA Backs Off Opposition to SRO
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Under an SEC order issued today, it will require considerably more wealth or assets for an investor to qualify to pay an investment adviser performance fees. The higher thresholds, mandated by Dodd-Frank reform, are meant to take inflation into account and will go into effect September 19.
Under the new order, the client must have at least $1 million under the management of the adviser, or a net worth of more than $2 million before an investment adviser can charge performance fees. The previous thresholds were $750,000 and $1.5 million respectively, and were last revised in 1998.
Performance fees typically hover around 20 percent and are primarily the province of hedge funds and other asset managers; investment advisers who focus on providing wealth management and planning services to individual high-net-worth clients rarely charge clients performance fees. According to data gathered by the Investment Adviser’s Association from form ADVs, some 3,233 investment advisers out of a total of 11,643 charged performance fees as of April 2010. That is up from 1,493 who charged performance fees out of a total of around 7,000 in 2001. Meanwhile, approximately 11,110 of that total charged AUM-based fees in April of 2010.
“Part of it, without a doubt, is the fact that a significant number of hedge fund advisers have voluntarily registered with the SEC during the past several years,” said David Tittsworth, executive director of the IAA, referring to the growth in the number of RIAs who charge performance fees.
Under Dodd‑Frank, the Commission was required to issue an order to adjust these thresholds for inflation by July 21, 2011 and every five years thereafter. The order will be effective on September 19, 2011, which will be approximately 60 days after its publication in the Federal Register.
The Commission had also proposed excluding the value of a person's primary residence from determination of the client's net worth standard. That is still under consideration.
Consumer Group Drops Opposition To SRO For Investment Advisers
In other regulatory news, the Consumer Federation of America, a staunchly pro-consumer group, said publicly Tuesday that it would no longer oppose having an SRO help the SEC oversee investment advisers. The CFA has fought tooth and nail to get more money for the SEC to do its job of regulating investment advisers, but in testimony before the Senate Banking Committee, Barbara Roper, the CFA’s head of investor protection, said she does not now expect that will happen. "We have concluded that a properly structured SRO proposal would be a significant improvement over the status quo," said Roper.
FINRA has been very vocal about the fact that it would like to be the SRO for investment advisers, and has stepped up its enforcement and disciplinary functions this year to show it has the mettle to do more. But there are other candidates for the job as well.
“The way I read her statement was that they still believe it is optimal for the SEC to have adequate resources to do its job,” said Tittsworth in response. “There are a variety of ways you can get there. One is user fees, which were identified as one option in the SEC’s 914 staff report.”
