SEC Raises Qualified Client Thresholds to $1.4M and $2.7M: What Changes June 29, 2026

TL;DR: On April 28, 2026, the SEC issued Release No. IA-6961, raising the dollar thresholds for "qualified client" status under Rule 205-3 of the Investment Advisers Act of 1940. Effective June 29, 2026, the assets-under-management test rose from $1,100,000 to $1,400,000, and the net-worth test rose from $2,200,000 to $2,700,000. This is the mandatory five-year inflation adjustment required by Dodd-Frank, and it determines who an adviser can legally charge a performance fee. Contracts signed before June 29, 2026 are grandfathered under the old numbers. New subscriptions after that date are not.

You've probably heard the term "accredited investor" a hundred times. You've probably heard "qualified client" a lot less, and if you're like most people in my inbox, you assume it's just another way of saying the same thing. It isn't. Accredited investor status gets you into the deal. Qualified client status determines whether the person running the deal is allowed to take a cut of your profits. Those are two different gates, guarding two different doors, and the SEC just moved one of them.

What Rule 205-3 Actually Does

Start with the default rule, because the default rule is a prohibition. Section 205(a)(1) of the Investment Advisers Act bars an investment adviser from charging a client compensation based on a share of capital gains or capital appreciation. The industry calls this a performance fee, an incentive allocation, or carried interest, depending on the wrapper. Congress didn't want advisers with a cut of the upside pushing unsophisticated clients into riskier bets than those clients understood or could afford. That's the policy logic, and it's held up since 1940.

Section 205(e) gives the SEC room to carve out an exception for clients who don't need that protection. These are people with enough money or enough sophistication that a performance fee isn't a dangerous incentive. Rule 205-3 is that exception. It says an adviser can charge a performance fee if the client is a "qualified client," tested one of two ways: the client has at least a set dollar amount under the adviser's management right after signing (the assets-under-management test), or the adviser reasonably believes the client's net worth clears a second dollar threshold (the net-worth test). Clear either bar, and the performance-fee ban doesn't apply to you.

Dodd-Frank added a maintenance requirement in 2010. The SEC has to adjust both thresholds for inflation every five years, rounded to the nearest $100,000, using the Personal Consumption Expenditures Chain-Type Price Index. That's produced adjustments in 2011, 2016, 2021, and now 2026. As the SEC's order and the Federal Register notice both confirm, the 2026 order reflects inflation from 2021 through the end of 2025. It's a routine, mechanical update, not a policy shift and not a crackdown. It's the SEC doing what Section 418 of Dodd-Frank tells it to do on schedule, as tax and advisory firm Withum notes in its own client alert on the change.

This matters well beyond individual advisory accounts. For private funds relying on Section 3(c)(1) of the Investment Company Act, the exemption that lets a fund skip registration as an investment company if it has 100 or fewer beneficial owners, every single investor who's being charged a performance allocation has to independently clear the qualified-client bar. As Simpson Thacher's analysis points out, that requirement runs on a fund-by-fund, investor-by-investor basis. One investor short of the threshold isn't a rounding error. It's a compliance problem for the fund.

Three Tests, Three Different Jobs

Here's where I see the confusion happen most. Founders raising a friends-and-family round, angels writing their first checks, and even some newer fund managers use "accredited," "qualified client," and "qualified purchaser" like they're interchangeable. They're not. Each one answers a different question, set under a different statute, with different dollar amounts.

Test	Governing Rule	Dollar Threshold	What It Unlocks
Accredited Investor	Regulation D, Rule 501 (Securities Act)	$200,000 individual income ($300,000 joint) in each of the last two years, or $1,000,000 net worth excluding primary residence	Eligibility to invest in unregistered securities: private placements, Reg D offerings, most startup and fund deals
Qualified Client	Rule 205-3 (Investment Advisers Act)	$1,400,000 under management with the adviser, or $2,700,000 net worth (as of June 29, 2026)	Eligibility to be charged a performance fee, incentive allocation, or carried interest by an adviser
Qualified Purchaser	Section 2(a)(51) (Investment Company Act)	$5,000,000 in investments (individuals and family companies), or $25,000,000 for entities investing on a discretionary basis	Eligibility to invest in a 3(c)(7) fund, which has no cap on investor count, and this status automatically satisfies qualified-client status too

Notice the overlap at the bottom. A qualified purchaser is automatically a qualified client. The higher bar swallows the lower one. So does a "knowledgeable employee" of the adviser under Rule 3c-5, a status Greenberg Traurig's client alert confirms is untouched by this update. But accredited investor status buys you none of that. You can be fully accredited at a $1.2 million net worth and still be legally barred from paying a performance fee, because $1.2 million clears the $1 million accredited bar but falls short of the new $2.7 million qualified-client bar. Being allowed into the fund and being allowed to pay a promote are separate questions, and the second one just got harder to clear.

Who Actually Gets Squeezed

The AUM test moved by $300,000 and the net-worth test moved by $500,000. That's not a rounding tweak for anyone sitting near the old line. Picture an investor with a $2.4 million net worth who signed on with an RIA in 2022 under the old $2.2 million threshold. They cleared the bar then. If that same person tries to make a new subscription into a 3(c)(1) fund, or sign a fresh advisory contract with a performance fee, on or after June 29, 2026, they need $2.7 million, not $2.2 million. They're grandfathered on the position they already hold. They are not grandfathered on the next check they want to write.

That's the group I'd worry about most: investors who were qualified clients under the old math and are not qualified clients under the new math, sitting in that $2.2 million to $2.7 million net-worth band or the $1.1 million to $1.4 million AUM band. An adviser can keep the existing relationship running under the old contract. An adviser cannot use that same client's old qualification to justify a new performance-fee arrangement after the effective date.

For emerging fund managers, the to-do list is concrete. Subscription agreements and investor questionnaires that reference "$1,100,000" or "$2,200,000" need updated language reflecting $1,400,000 and $2,700,000, for any new closing on or after June 29, 2026. Side letters and LPA definitions that hardcode the old dollar figures instead of cross-referencing Rule 205-3 need a look. Some funds wrote the specific numbers into their governing documents years ago rather than incorporating the rule by reference, and those funds now have stale contract language even though the rule itself updated automatically. Compliance manuals, Form ADV disclosures, and net-worth certification templates all need the same refresh. Kirkland & Ellis's client note flags the same set of documents, and Winstead's investment management alert puts amending subscription and transfer agreements first on its action list for advisers. If you run a 3(c)(1) vehicle, this is not optional paperwork. An investor who fails to meet the current threshold and still gets charged a performance allocation is a real regulatory exposure for the adviser, not a technicality.

Family offices and RIAs advising high-net-worth clients on separately managed accounts face the identical math on individual contracts. If your firm's standard performance-fee agreement assumes a client at $2.3 million net worth still qualifies, that assumption breaks for anyone signing after June 29, 2026. Existing SMAs are fine. New ones need the updated screen.

The Honest Caveats

Grandfathering is real but narrower than people assume. Rule 205-3's transition provision protects a contract that satisfied the qualified-client standard at the time it was signed. It doesn't protect a new party joining that contract later. If a natural person who wasn't originally part of an advisory agreement becomes a party to it on or after June 29, 2026, including a new investor coming into an existing 3(c)(1) fund, the new $1.4 million and $2.7 million thresholds apply to them, even though the fund itself launched years earlier under the old numbers. Paul, Weiss's client memo spells out this exact distinction. What's grandfathered is each individual investor's original subscription, evaluated investor by investor, not the fund as a whole.

There's also a timing wrinkle for funds that admit investors on a monthly or quarterly cycle. Simpson Thacher's guidance notes that a subscription executed in June but settling in July gets tested under whichever standard applies on the settlement date, not the signature date. Get your fund administrator and transfer agent aligned on that before your next close.

State law adds a second layer some advisers overlook. A number of state exemptions for private fund advisers incorporate the federal qualified-client standard by reference, meaning state-registered advisers, not just SEC-registered ones, can be pulled into this update even though they never interact with the SEC directly. If you're state-registered, don't assume this is a federal-only issue. Check your state's exemptive rule language.

None of this changes what your fund's actual strategy or track record is worth. It changes the paperwork gate an investor has to clear before you can charge them a share of what you make them. Get the paperwork wrong, and the fee itself becomes the exposure, regardless of how the fund performs.

For more on this, see our coverage of The 3(c)(7) Exemption: What Qualified Purchaser Status Actually Means for Private Fund Investors, BREIT Class L $70M Raise: Qualified Purchaser vs Accredited Investor Explained, The SEC's New Risk Alert on Fee Disclosures, and How to Become an Accredited Investor in 2026: A Complete Guide.

Frequently Asked Questions

Is a qualified client the same thing as an accredited investor?

No. Accredited investor status under Regulation D determines whether someone can legally invest in a private securities offering at all. Qualified client status under Rule 205-3 determines whether an adviser can charge that same person a performance fee once they've invested. You can be accredited without being a qualified client, and the dollar thresholds for each are set under entirely different statutes.

Do the new thresholds apply to investors who already invested in my fund?

Generally no. Rule 205-3 includes a transition provision protecting contractual relationships entered into before June 29, 2026, under the standard in effect when the contract was signed. The new $1.4 million and $2.7 million thresholds apply to new advisory contracts, new fund subscriptions, and new parties added to existing contracts on or after that date.

What happens if a private fund investor no longer meets the qualified-client test?

For an existing investor who qualified when they subscribed, nothing changes on their current position. They're grandfathered. But if that same investor wants to make an additional subscription into the fund after June 29, 2026, they have to independently satisfy the new thresholds at the time of that new investment, regardless of what they cleared originally.

Does qualifying as a qualified purchaser automatically make someone a qualified client?

Yes. Anyone who meets the qualified purchaser definition under Section 2(a)(51) of the Investment Company Act, generally $5 million in investments for individuals or $25 million for entities investing on a discretionary basis, is automatically treated as a qualified client under Rule 205-3, with no separate net-worth or AUM calculation required.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.