* See Memorandum to Investment Advisers Committee No. 33-97, dated November 19, 1997 and Memorandum to
Closed-End Investment Company Committee No. 48-97, SEC Rules Committee No. 114-97, dated November 21, 1997.
[9604]
January 16, 1998
TO: CLOSED-END INVESTMENT COMPANY COMMITTEE No. 3-98
INVESTMENT ADVISERS COMMITTEE No. 3-98
SEC RULES COMMITTEE No. 4-98
RE: INSTITUTE COMMENT LETTER ON SEC'S PROPOSED AMENDMENTS TO
PERFORMANCE FEE RULE
______________________________________________________________________________
As we previously reported, the Securities and Exchange Commission proposed amendments to
Rule 205-3 under the Investment Advisers Act of 1940, the rule that permits investment advisers to
charge certain clients performance fees.* A copy of the InstituteGs comment letter on the proposal is
attached and briefly summarized below.
The letter supports the proposed amendments to Rule 205-3 that would permit investment
advisers to enter into performance fee arrangements with any client with a net worth in excess of
$1,500,000 or assets under the management of the investment adviser of at least $750,000 (“qualified
clients”). (The current requirements are $500,000 and $1,000,000 respectively.) The letter states that it is
reasonable to revise the thresholds in the current rule, as proposed, to reflect the effects of inflation
since Rule 205-3 was adopted in 1985. The letter also recommends that the Commission revise the
proposed definition of qualified clients to include certain “knowledgeable employees” of the investment
adviser even if they do not meet the ruleGs criteria regarding net worth or assets under management.
Because of their financial acumen and experience in working in the investment advisory industry, these
persons should be capable of protecting their own interests in negotiating performance fees.
The letter strongly supports the proposed elimination of several conditions in current Rule 205-3
that prescribe the methodology for computing a performance fee and that require advisers to make
certain specific disclosures about performance fees. The letter points out that qualified clients are
capable of protecting their own interests and, therefore, the particulars of any performance fee
arrangement are best left to negotiation between the client and the adviser.
The letter also requests clarification regarding whether Rule 205-3 permits a trust, governmental
plan, collective trust fund, or separate account referred to in section 3(c)(11) of the Investment
Company Act to be charged a “fulcrum fee.”
Dorothy M. Donohue
Associate Counsel
Attachment