WASHINGTON -- The SEC has just made it easier for investment advisers to charge performance-related fees.
By expanding the category of investors with which money managers can enter into such arrangements, the Securities and Exchange Commission has given money managers greater flexibility to charge fees based on a share of the capital gains or capital appreciation on investments.
Under the recent changes, money managers may enter into such arrangements with "qualified purchasers," investment pools whose investors hold at least $5 million each. The changes also allow investment advisory firms to set up such arrangements with their employees, considered to be sophisticated investors who don't need protection under securities rules.
The SEC also has eliminated the requirement that money managers explain the risks of such arrangements to clients.
These changes were necessitated by 1996 changes in securities laws.
But the SEC also has raised some thresholds, in line with inflation. Now, clients must have investments of at least $750,000 with the investment adviser or a net worth of more than $1.5 million before they may be charged performance fees. That's up from investments of at least $500,000 or a net worth exceeding $1 million.
The securities watchdog had assumed such clients, because of their high net worth, were financially sophisticated and did not need the protection of securities rules.
A 1992 report by the SEC's division of investment management had recommended giving money managers more leeway in entering into performance-fee arrangements with their clients, and the 1996 law did just that.
An SEC analysis of the amendments to the rule suggests more investors will qualify for performance-fee arrangements, even though conventional wisdom might dictate that raising the thresholds might mean fewer would qualify, said Kathy Ireland, an attorney in the SEC's investment management division.
At the same time, the securities regulator has given investment advisers the green light to delay telling their clients about trades conducted through their brokerage affiliates.
Investment advisers may tell clients about these trades before they are settled, rather than when they are executed, under recent guidance issued.
Until now, investment advisers could trade through their brokerage affiliates, so long as they had client approval, and disclosed each trade as it occurred, for example, if it was a "principal trade." In such trades, an adviser, acting for its own account, buys or sells a security from a client.
The guidance was necessary because many investment advisers are affiliated with broker-dealers, and might find they can get the best price through their brokerage affiliates, but securities laws treat the broker-dealer and money manager as a single entity, explained Douglas J. Scheidt, chief counsel in the SEC's investment management division.
The ruling also permits money managers to cross-trade securities between clients without disclosing the trades to their clients, so long as the adviser does not charge a commission, he said.
At the same time, the SEC has made it harder for large investment managers to keep their trades secret. Under securities law, managers with more than $100 million under management are required to disclose their trades to the SEC every quarter. Because their trading activities frequently prompt imitators, large investors often have sought SEC permission to not disclose all of their buying and selling. Now, the SEC has made it harder for them to get that permission.
Investment advisers must list the reasons it is imperative for them to have confidentiality -- for example, if they are taking advantage of inefficiencies in the market to make a profit, or if they are in the middle of a program of buying and selling securities at the end of the reporting period.