Qualified Client.

The Investment Company Act of 1940

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17 CFR Section 275.205-3– Definition of a Qualified Client

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(d) Definitions. For the purposes of this section:

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  1. ~(1) The term qualified client means:
  2. ~~(i) A natural person who, or a company that, immediately after entering into the contract has, under the management of the investment adviser, at least the applicable dollar amount specified in the most recent order;
  3. ~~(ii) A natural person who, or a company that, the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, either:
  4. ~~~(A) Has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than the applicable dollar amount specified in the most recent order. For purposes of calculating a natural person's net worth:
  5. ~~~~(1) The person's primary residence must not be included as an asset;
  6. ~~~~(2) Indebtedness secured by the person's primary residence, up to the estimated fair market value of the primary residence at the time the investment advisory contract is entered into may not be included as a liability (except that if the amount of such indebtedness outstanding at the time of calculation exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of the primary residence, the amount of such excess must be included as a liability); and
  7. ~~~~(3) Indebtedness that is secured by the person's primary residence in excess of the estimated fair market value of the residence must be included as a liability; or
  8. ~~~(B) Is a qualified purchaser as defined in section 2(a)(51)(A) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(51)(A)) at the time the contract is entered into; or
  9. ~~(iii) A natural person who immediately prior to entering into the contract is:
  10. ~~~(A) An executive officer, director, trustee, general partner, or person serving in a similar capacity, of the investment adviser; or
  11. ~~~(B) An employee of the investment adviser (other than an employee performing solely clerical, secretarial or administrative functions with regard to the investment adviser) who, in connection with his or her regular functions or duties, participates in the investment activities of such investment adviser, provided that such employee has been performing such functions and duties for or on behalf of the investment adviser, or substantially similar functions or duties for or on behalf of another company for at least 12 months.


Rule 205-3 of the Investment Advisers Act of 1940 permits investment advisers to receive performance-based compensation only when the client is a “qualified client,” which may capture performance fees or distributions of carried interest. To qualify as a “qualified client,” a natural person or company must:

  1. have at least $1.1 million in assets under management with the investment adviser immediately after entering into the advisory contract;
  2. have a net worth (together, in the case of a client that is a natural person, with assets held jointly with a spouse) that the investment adviser reasonably believes to be in excess of $2.2 million (excluding the value of such natural person’s primary residence and indebtedness secured by such residence) immediately prior to entering into the advisory contract;
  3. be a “qualified purchaser” as defined in Section 2(a)(51)(A) of the Investment Company Act of 1940; or
  4. be a “knowledgeable employee” of the investment adviser.