Qualified Client: The Advisers Act Line for Performance Fees

A qualified client is the Advisers Act test that lets a registered adviser charge a performance fee — including carried interest — to that client. It is Rule 205-3, not Regulation D and not section 3(c)(7). As of June 29, 2026, the dollar tests are at least $1,400,000 under the adviser's management immediately after entering the contract, or a net worth of more than $2,700,000 immediately prior. (SEC, Advisers Act Release No. IA-6961, Apr. 28, 2026; 91 Fed. Reg. 23520, May 1, 2026) Qualified purchasers and certain knowledgeable employees also qualify, without those dollar amounts.

This is general information, not legal advice. Status is tested at the contract (or, for a 3(c)(1) fund, at the equity owner's admission). Counsel should apply the rule to the facts.

Why the Advisers Act cares about performance fees

Section 205(a)(1) of the Advisers Act generally prohibits an investment adviser registered or required to be registered with the Commission from entering into, extending, renewing, or performing an advisory contract that provides for compensation based on a share of capital gains on, or capital appreciation of, the client's funds (15 U.S.C. § 80b-5(a)(1)). Congress treated that fee as a speculation incentive. Section 205(e) lets the Commission exempt contracts with persons who do not need that protection. Rule 205-3 is that exemption: the client must be a qualified client (17 CFR § 275.205-3(a)).

Two statutory carve-outs sit beside the rule, not inside it:

• The prohibition does not apply to an advisory contract with a company excepted from the Investment Company Act under section 3(c)(7) (15 U.S.C. § 80b-5(b)(4)). A 3(c)(7) fund is not a Rule 205-3 look-through problem. The owners still have to be qualified purchasers.

• The prohibition does not apply to a contract with a person who is not a resident of the United States (15 U.S.C. § 80b-5(b)(5)).

Section 205 applies to advisers registered or required to be registered. Exempt reporting advisers are not in that set. The moment the adviser is required to register, new parties to the contract — including new equity owners of a 3(c)(1) vehicle — are tested under the rule then in effect (17 CFR § 275.205-3(c)(2)). Whether you need an ERA or an RIA is the ERA guide. Carry mechanics, once the fee is allowed, are how carry works.

Qualified client under the Advisers Act: the dollar tests

Rule 205-3(d)(1) does not hard-code the dollars. It points to the Commission's most recent order adjusting the thresholds for inflation (17 CFR § 275.205-3(d)(1), (d)(5), (e)). IA-6961 is that order as of this writing. Effective June 29, 2026:

The AUM test is assets with this adviser, not household net worth and not RAUM across unaffiliated firms. A $2 million commitment to a first-time manager can satisfy AUM on day one if it is actually under that adviser's management after the contract. A $2 million net-worth LP with a $50,000 check does not satisfy AUM at that manager; that LP needs the net-worth test, QP status, or another paragraph of the definition.

Net worth mechanics (17 CFR § 275.205-3(d)(1)(ii)(A)):

• Exclude the primary residence as an asset.

• Do not include, as a liability, indebtedness secured by the primary residence up to the home's estimated fair market value at contract date — except that if that indebtedness exceeds the amount outstanding 60 days before, other than as a result of acquiring the residence, the excess is a liability.

• Include as a liability any home-secured debt above the home's estimated fair market value.

Those residence rules are the same shape as the accredited-investor net-worth test. The dollar line is not. Accredited natural-person net worth is over $1 million excluding the home (17 CFR § 230.501(a)(5)). Qualified client net worth is more than $2.7 million under the 2026 order. Do not treat a 506(c) verification letter as a Rule 205-3 file.

Inflation adjustments are required at least every five years, rounded to the nearest multiple of $100,000 (15 U.S.C. § 80b-5(e); rule 205-3(e)). The next cycle after 2026 is the order on or about May 1, 2031. Do not hard-code today's dollars into an LPA without a "then-applicable Rule 205-3" cross-reference.

Who is a qualified client without the dollar tests

Qualified purchaser. A natural person or company the adviser reasonably believes is a qualified purchaser under Investment Company Act section 2(a)(51)(A) at contract date is a qualified client (rule 205-3(d)(1)(ii)(B)). The QP line is $5 million in investments (natural person / family company) or $25 million owned and invested on a discretionary basis — investments, not net worth. That definition lives on the qualified purchaser vs accredited investor page. QP status is a one-way implication: a QP is a qualified client. A qualified client is not automatically a QP.

Knowledgeable employees of the adviser. A natural person who, immediately prior to the contract, is an executive officer, director, trustee, general partner, or person serving in a similar capacity of the investment adviser; or an employee (other than purely clerical, secretarial, or administrative) who, in connection with regular functions, participates in the adviser's investment activities, and has done so for the adviser or in a substantially similar role for another company for at least 12 months (rule 205-3(d)(1)(iii), (d)(4)). This is the adviser's team, not the "knowledgeable employee" concept in ICA rule 3c-5, which is a fund-level counting rule. Do not mix the two files.

3(c)(1) look-through is the trap

Rule 205-3(b) and (d)(3) treat each equity owner of a private investment company as a client for the performance-fee prohibition, except the adviser and any owner not charged the performance fee. "Private investment company" means a company that would be an investment company under ICA section 3(a) but for section 3(c)(1) — not 3(c)(7).

Consequences for a GP charging carry:

• 3(c)(1) fund or SPV, adviser is registered or required to be registered. Each LP who pays carry must be a qualified client at admission (or fit the transition rule). One non-QC LP who is charged carry breaks the exemption as to that person. The fix is not to "average" the vehicle's AUM.

• 3(c)(7) fund. Section 205(a)(1) does not apply to the advisory contract with that company (§ 80b-5(b)(4)). The ICA still requires qualified purchasers. Investor-count limits are 3(c)(1) vs 3(c)(7).

• Owners not charged carry. Rule 205-3(b) excepts equity owners who are not charged the performance fee. A GP entity that does not pay itself carry on its own GP commitment is not the problem child; the full-fee LP who is only accredited is.

Deal-by-deal SPVs that rely on 3(c)(1) and charge a promote, advised by an RIA, are in the look-through. "It's just an SPV" is not an exemption.

Transition: old contracts, new LPs

Rule 205-3(c)(1): if a registered adviser entered into a contract and satisfied the conditions then in effect, the adviser is considered to satisfy the rule. If a natural person or company who was not a party becomes a party — including an equity owner of a private investment company — the conditions in effect at that later time apply to that person.

IA-6961 is explicit: the June 29, 2026 adjustments do not generally apply retroactively to contracts entered into before that date, subject to those transition rules. A 3(c)(1) fund that closed in 2024 on the $2.2 million net-worth test does not have to kick out existing LPs. A new LP admitted on or after June 29, 2026, who is relying on net worth, needs more than $2.7 million.

Transfers by gift, bequest, or under a legal-separation or divorce agreement do not, solely for the transition paragraphs, cause the transferee to "become a party" (rule 205-3(c)(3)). Secondary sales and ordinary admissions do.

Qualified client vs accredited investor vs qualified purchaser

An LP can be accredited, fail qualified client, and still subscribe to a 3(c)(1) SPV that charges no carry. An LP can be a qualified client on the AUM test and still fail QP. An LP can be a QP (hence a QC) and still need a 506 accredited analysis for the offering. Three tests, three files.

What GPs should put in the subscription booklet

For an RIA (or an ERA about to register) charging carry on a 3(c)(1) vehicle:

• Representations that track Rule 205-3(d)(1) as then in effect, not a frozen $2.2 million line.

• AUM test: assets under this adviser, measured after the contract.

• Net worth: residence haircut, 60-day mortgage rule, reasonable-belief file (what the adviser actually reviewed).

• QP and knowledgeable-employee boxes as alternatives, with the right definitions.

• A process for subsequent closings: new LPs are tested under the order in effect on their admission date.

Allocations' published fees — $9,950 Standard SPV, $19,500 Premium SPV, $19,500/year fund, 0% platform carry — are administration pricing. They do not make an LP a qualified client and they are not the manager's promote. The promote is the performance fee Rule 205-3 is about.

Do not treat qualified client as a nicer name for accredited investor. It is the carry gate for registered advisers on 3(c)(1) capital. Get the order date right, look through the 3(c)(1) vehicle, and leave 3(c)(7) to the QP page.