The SEC issued notice that it intends to raise the dollar thresholds for allowing registered investment advisers (including fund managers) to charge performance based fees.  Under the current rule (205-3), a registered investment adviser may only receive compensation based on a share of capital gains on, or capital appreciation of, client funds (aka a performance fee) if the client has a net worth of more than $1.5 Million or has at least $750,000 in assets under management with the adviser.  The SEC intends to raise the thresholds to $2 Million and $1 Million, respectively.  The net worth test would exclude the value of a client's primary residence.  The new thresholds will take effect no later than July 21, 2011 and will be adjusted every 5 years based on inflation.   The transition rules allow firms to grandfather in current clients and their follow-on investments.  The rule applies to investors in registered funds and private funds (unless all investors are qualified purchasers).

OUR TAKE:  These changes will have a significant impact on hedge and private equity managers, most of whom charge performance fees.  Raising the net worth requirement to $2 Million and excluding the value of a client's personal residence will likely exclude many potential investors.