SEC: RAISE WORTH THRESHOLD BEFORE CLIENTS CHARGED BY ADVISERS

The following announcement came from the SEC web site. In this announcement the SEC discusses proposed changes to how a threshold is determined before a financial adviser can charge a fee:

Washington, D.C., May 10, 2011 – The Securities and Exchange Commission today provided public notice of its plan to raise certain dollar thresholds that would need to be met before investment advisers can charge their clients performance fees. The SEC seeks public comment on the plan, which would satisfy a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Currently, Rule 205-3 under the Investment Advisers Act allows an adviser to charge its clients performance fees in certain circumstances. Two of the circumstances are:
The client has at least $750,000 under management with the adviser.
The adviser reasonably believes the client has a net worth of more than $1.5 million.
Section 418 of the Dodd-Frank Act requires the SEC to issue an order to adjust for inflation these dollar amount thresholds by July 21, 2011, and every five years thereafter. As a result, the SEC issued today’s notice that it intends to issue an order to revise the dollar amount tests to $1 million for assets under management and $2 million for net worth.
The Commission also proposed related amendments to Rule 205-3 that would:
Provide the method for calculating future inflation adjustments of the dollar amount tests.
Exclude the value of a person’s primary residence from the determination of whether a person meets the net worth standard.
Modify the transition provisions of the rule to take into account performance fee arrangements that were permissible at the time the adviser and client entered into their advisory contract.”

One important change noted above is the provision to exclude the value of a person’s primary residence when computing net worth. After the real estate collapse and current weakness in the real estate market, the determination of the value of a person’s home seems to be precarious. In many areas of the United States the value of homes is still falling with no end in sight.