A state-registered investment adviser (IA) has decided to implement a new fee structure that includes a performance-based fee for certain qualified clients. Under the Uniform Securities Act (USA), what is generally required for an IA to charge performance-based fees?
- APerformance-based fees are permitted for state-registered IAs only if the client meets specific net worth or AUM thresholds, and proper disclosures are made.
- BPerformance-based fees are strictly prohibited for all state-registered IAs under the USA.
- CPerformance-based fees are permitted for any client, provided the client signs a waiver acknowledging the risks.
- DPerformance-based fees are permitted only for federal covered investment advisers (FCIAs) and not state-registered IAs.
Show answer & explanationAnswer & explanation
Correct answer: A. Performance-based fees are permitted for state-registered IAs only if the client meets specific net worth or AUM thresholds, and proper disclosures are made.
Performance-based fees are generally prohibited for investment advisers due to the potential conflict of interest they create (incentivizing excessive risk-taking). However, exceptions exist for 'qualified clients' who meet specific net worth or AUM thresholds, provided certain disclosures are made. This applies to both state-registered IAs (under NASAA rules) and FCIAs (under SEC rules).
Why the other options are wrong
- B. This is incorrect; there are exceptions for qualified clients.
- C. A waiver alone is insufficient. The client must meet specific financial thresholds, and detailed disclosures are still required.
- D. This is incorrect; state-registered IAs can also charge performance-based fees to qualified clients under NASAA rules.
Performance-Based Fees (USA)
Performance-based fees for investment advisers are generally prohibited due to conflicts of interest, but an exception exists for 'qualified clients' who meet specific financial thresholds (net worth or AUM), provided the IA makes full disclosures.
- General prohibition due to conflicts.
- Exception for 'qualified clients'.
- Qualified client thresholds: specific net worth or AUM.
- Full disclosure of fee structure and risks is mandatory.
Memory trick: Performance pay? Only if wealthy, and info you convey.