SEC Proposes Accredited Investors as Qualified Clients: What Private Fund Managers Should Review

On 30 September 2026 the SEC proposed changes to Rule 205-3 under the Investment Advisers Act, the rule that decides which clients an adviser may charge a performance fee. The proposal was published in the Federal Register on 6 October 2026, and comments are due on 7 December 2026. The change that matters most to private fund managers is that the "qualified client" definition would drop its two dollar tests, a $1.4 million assets-under-management test and a $2.7 million net worth test, and use the Regulation D accredited investor standard instead. This is a proposal, not a rule. Nothing in your fund documents has to change today, but your investor base is the thing to review now.

What the proposal would change

The two dollar thresholds are the inflation-adjusted figures as of 29 June 2026. Under the proposal an individual would qualify if the adviser reasonably believes, when the contract is signed, that the person is an accredited investor, which for individuals generally means net worth above $1 million excluding the primary residence, or income above $200,000 ($300,000 jointly). Entities with more than $5 million in assets or investments would qualify on the entity test. The five-year inflation adjustment of the old thresholds would go away.

For a fund that relies on the Section 3(c)(1) exclusion, the look-through stays. Each equity owner who is charged a performance fee must be a qualified client, and the fund cannot qualify on its own accredited status. Performance fees have been most common in Section 3(c)(7) funds, whose investors are qualified purchasers, generally those with at least $5 million in investments, so the proposal matters most for managers running 3(c)(1) vehicles with individual and family office investors.

On the same day the SEC also issued five notices asking for comment on new ways to qualify as an accredited investor under Rule 501(a)(10): passing an exam to be developed by FINRA, holding a US CPA license, holding a CFA charter, holding a CFP certification, or holding a Series 79 or a Series 86 and 87 license. None would take effect without a later SEC order, and the SEC used the same authority in 2020 for Series 7, 65 and 82 holders. The package also proposes to let registered funds and business development companies charge performance fees, capped at 20% of net gains and subject to governance conditions, which is the part of the proposal aimed at wider retail access.

Who could gain and who could lose

On the net worth test alone, the bar for performance-fee eligibility would fall from $2.7 million to $1 million, a reduction of about 63%, and an income route that does not exist in the qualified client definition today would open. That is the upside for a 3(c)(1) manager, who could charge a fee to investors who are accredited but not currently qualified clients.

The SEC also says some investors could lose eligibility. An entity that qualifies today on the $2.7 million net worth test might face the $5 million entity tests, and a person who qualifies only through the $1.4 million assets test but is not accredited would be excluded. The SEC expects both groups to be small and asked for comment. Existing contracts are generally governed by the rules in effect when they were signed. How the transition treats a new investor admitted to an existing fund after a final rule is a point to raise with counsel, because we found no clear answer in the sources we reviewed.

What to review before 7 December

This section is our practical suggestion, not SEC guidance. First, map every fee-paying investor in each 3(c)(1) fund by the basis on which they are a qualified client today. Count them two ways, as a share of investors and as a share of committed capital, and find the proportion that rely only on the assets or net worth tests, because that is the group the proposal could affect.

Second, read your limited partnership agreement and subscription documents for any representation that names "qualified client" or Rule 205-3, and check whether side letters promise carried interest or fee terms by investor status. Third, keep fundraising materials accurate: describe the proposal as a proposal, and do not tell prospects they will be eligible for a fee structure that has not been adopted. Our guide to 506(b) versus 506(c) offerings covers the investor status checks that already sit under Regulation D. Fourth, decide whether to file a comment.

This follows the SEC's new examination handbook, which we covered in what private fund managers should do before an examination notice arrives. In our view, investor eligibility records are worth keeping exam-ready, so the review above does double duty.

What to watch next

Watch for the comment deadline on 7 December 2026, for any SEC order designating the credential-based accredited investor routes, and for a final rule. FundLinx members can see which investor types are active in private funds.

This article is general information and is not legal advice, so talk to your counsel about how the proposal affects your funds.

FundLinx Intelligence | FundLinx.ai