The SEC adopted a Final Rule change to the Investment Advisers Act of 1940, effectively tightening the way investment advisors compute performance fees.  Wednesday's rule change raises the net worth requirement for investors who pay performance fees, by excluding the value of the investor’s home from the net worth calculation. Current SEC rules permit RIAs (registered investment advisors) to charge clients performance fees if the client’s net worth or AUM (assets under management) with the adviser meet certain dollar thresholds.  A "qualified client" is an investor who meets the net worth or asset threshold, and deemed able to bear the risks associated with performance fee arrangements. Change One. As revised, RIA “qualified clients” will have to have:  (i) at least $1 million of AUM  with the adviser - up from $750,000;  or, (ii) net worth of at least $2 million - up from $1 million.  The changes conform the rule’s dollar thresholds to levels set by an SEC order in July 2011, and comply with a mandate of the Dodd-Frank Reform Act of 2010. Change Two. The value of a client’s primary residence and certain property-related debts will now be excluded from the net worth calculation.   While this change was not required by by the Dodd-Frank Act, it is consistent with changes approved by the SEC in December to as they pertain to net worth calculations for an “accredited investors” who may invest in certain unregistered securities offerings. Change Three. A new grandfather provision will permit RIAs to continue charging clients performance fees if the clients were considered “qualified clients” before the rule changes. In addition, the grandfather provision also will permit newly registering IAs to continue charging performance fees to those clients they were already charging performance fees. Change Four. Every 5 years, the SEC will announce inflation adjustments to the dollar thresholds used in the "qualified client" calculations. The rule amendments will take effect 90 days after publication in the Federal Register, but investment advisers may rely on the grandfather provisions before then. For further details, go to:  [SEC PR 12-29, 2/15/12] and    [SEC Final Rule Release IA-3372].