NASAA Series 63Regulation of Investment Advisers and IARsHard
An investment adviser wishes to charge a registered investment company client a performance-based fee that increases or decreases proportionately with the fund's performance relative to a specified index, applied symmetrically for both gains and losses. Under the Uniform Securities Act, this fee arrangement:
- Arequires prior written approval from NASAA before implementation
- Bis permitted only if the investment company has net assets exceeding $150 million
- Cis prohibited unless the fund itself qualifies as a 'qualified client' under net worth thresholds
- Dis permitted under the fulcrum fee exception, regardless of the qualified client standard
Show answer & explanationAnswer & explanation
Correct answer: D. is permitted under the fulcrum fee exception, regardless of the qualified client standard
A symmetrical 'fulcrum fee,' which increases and decreases proportionately with investment performance relative to a benchmark, is a recognized exception permitting performance-based compensation for registered investment company clients, independent of the qualified client net worth/AUM test.
Why the other options are wrong
- A. NASAA does not pre-approve individual fee arrangements.
- B. There is no such $150 million net asset threshold tied to fulcrum fees.
- C. The qualified client standard is not the applicable test when a symmetrical fulcrum fee is used.
Fulcrum Fee Exception
A performance fee structure that rises and falls symmetrically with a fund's performance relative to a benchmark, permitted for registered investment companies without regard to the qualified client standard.
- Fee must be symmetrical (rewards gains, penalizes losses equally)
- Applies specifically to registered investment company clients
- Distinct exception from the general qualified client performance-fee rule
Memory trick: Symmetrical swing lets the fulcrum fee sing