The SEC has issued a new rule that further restricts a registered adviser's ability to charge performance fees.  Under the new rule, a registered adviser may only charge performance fees if the client has at least $1 Million under management with the adviser (up from $750,000) or a net worth of at least $2 Million (up from $1.5 Million).  The net worth requirement excludes the value of a person's primary residence and mortgage indebtedness up to the home's fair market value but includes indebtedness that exceeds the home's FMV and indebtedness incurred within 60 days of the relevant calculation date.  The rule applies to investors in private funds.  Current investors (including follow-on investments) need not qualify so long as they qualified at the time of investment (including because a private fund manager was not required to register).  However, a current investor into a new fund will be required to qualify if the investment occurs after the rule takes effect, which is expected to be May 2012.  The Rule also requires indexing for inflation every 5 years.  The rule codifies much of what the SEC ordered last July.

OUR TAKE:  Private fund managers must implement procedures and change their subscription docs to ensure that current clients meet the new thresholds when a new fund is launched.