Current Month (June 2026)
New Thresholds for “Qualified Client” Became Effective
By Karen Liu, Reid & Wise LLC, and Vineet Mehmi, J.D. Candidate at UC Law San Francisco
Effective as of June 29, 2026, an investor needs to meet higher thresholds for managed assets or net worth in order to qualify as a “qualified client” under Rule 205-3 of the Investment Advisers Act of 1940, as amended (“Advisers Act”), if such investor is not a “qualified purchaser” defined under the Investment Company Act of 1940.
Rule 205-3 provides an exemption from Advisers Act Section 205(a)(1) (which generally restricts registered investment advisers (“RIAs”) from charging compensation based on a share of capital gains on, or capital appreciation of, a client’s funds), to the extent that such client is a “qualified client” defined under Rule 205-3(d)(1).
The Dodd-Frank Wall Street Reform and Consumer Protection Act, among other things, authorizes the U.S. Securities and Exchange Commission (“SEC”) to adjust by order for the effects of inflation the dollar-amount thresholds of a “qualified client.” On April 28, 2026, the SEC issued an order increasing such dollar-amount thresholds.
Beginning June 29, 2026, an investor client of an RIA may qualify as a “qualified client” under the updated dollar tests if the client has
- at least $1.4 million in assets under management with the RIA immediately after entering into the advisory contract, increased from $1.1 million; or
- a net worth of more than $2.7 million immediately prior to entering into the advisory contract, increased from $2.2 million.
Under Rule 205-3’s transition provisions, existing advisory contracts that satisfied Rule 205-3 when entered into prior to June 29, 2026, generally should not need to be retested solely because of the increase. However, if a new person or company becomes a party to the contract after June 29, 2026, including a new equity owner of a private investment company advised by the adviser, the new thresholds would apply to that new person or company.
Advisers admitting new investors, entering into new advisory contracts, or approving transfers on or after June 29, 2026, should confirm that their subscription agreements, investor questionnaires, advisory agreements, transfer documents, offering materials, and compliance policies and procedures reflect the updated “qualified client” thresholds.
SEC Staff Issues Risk Alert on Economic Conflicts of Interest
By Vineet Mehmi, J.D. Candidate at UC Law San Francisco
On June 9, 2026, the Division of Examinations (“Division”) of the U.S. Securities and Exchange Commission (“SEC”) issued a Risk Alert sharing staff observations from examinations of SEC-registered investment advisers’ obligations related to economic conflicts of interest (“Risk Alert”).
The Risk Alert focuses on advisers’ fiduciary obligations under the Investment Advisers Act of 1940 (“Advisers Act”). As fiduciaries, advisers must eliminate or at least expose, through full and fair disclosure, conflicts of interest that might incline an adviser, consciously or unconsciously, to render advice that is not disinterested.
The Risk Alert identifies the following staff observations.
Cash Management Recommendations: The Division observed advisers that recommended programs where clients’ uninvested cash was automatically moved into interest-bearing accounts, including accounts held at affiliated parties. Some advisers received revenue tied to these cash management recommendations but failed to fully and fairly disclose the related conflicts. The staff also observed disclosures stating that advisers “may” receive revenue when the advisers were, in fact, receiving such revenue.
Other Revenue Opportunities: The Division observed conflicts related to advisers’ selection of mutual fund share classes, including where the selected share classes paid Rule 12b-1 fees or other compensation to the adviser, its affiliates, or its representatives, while lower-cost share classes of the same funds were available. The Risk Alert also identifies other economic benefits, including custodial credits, margin loans and credits, transaction markups, and clearing relationship credits.
Form ADV Disclosures: The Division observed incomplete or inconsistent disclosures in advisers’ Form ADV brochures. These included omissions under Item 10 regarding financial industry activities and affiliations, and incomplete disclosures under Item 12 regarding broker-dealer selection, compensation, and revenue sharing arrangements.
Fees Deviating from Agreements and Disclosures: The Division observed advisers charging fees inconsistently with advisory agreements or disclosures, including by charging fees on excluded assets, failing to apply reduced rates or householding, failing to rebate transaction fees, charging for services not provided after advisory personnel departed and accounts were not reassigned, double-billing after internal asset transfers, and failing to refund unearned prepaid fees after termination.
Compliance Programs: The Division observed compliance policies and procedures that did not fully address advisers’ billing practices or economic conflicts. Examples included policies that did not address prepaid fees, reduced fees, margin on client accounts, direct fee withdrawals, rebates, refunds, terminated accounts, or controls for manual billing errors.
The Risk Alert also relates to the SEC’s Fiscal Year 2026 Examination Priorities, which state, under “Effectiveness of Advisers’ Compliance Programs,” that examinations may focus on whether advisers’ policies and procedures are reasonably designed to address conflicts of interest and whether disclosures address fee-related conflicts arising from account and product compensation structure.
Advisers may use the Risk Alert as a checklist to review whether their actual revenue streams, fee billing practices, Form ADV disclosures, advisory agreements, and compliance policies are accurate, consistent, and tailored to their business practices.
FASB Issues Accounting Standard on Environmental Credits and Environmental Credit Obligations
By Thomas W. White, Retired Partner, WilmerHale
On May 19, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard to “provide clarity around” financial accounting for and disclosure of activities involving environmental credits and environmental credit obligations. The standard responds to feedback from stakeholders that entities are increasingly subject to government mandates and regulatory compliance programs related to emissions, which often result in obligations that may be settled with environmental credits. In addition, some entities that voluntarily commit to reducing emissions by a future date use environmental credits to partially offset their emissions. Stakeholders emphasized that current generally accepted accounting principles did not provide authoritative guidance on how to recognize and measure these credits and obligations.
The FASB’s new standard, which is embodied in Accounting Standards Update 2026-02, adds new Topic 818 to the Accounting Standards Codification. In general terms, the standard provides the following:
Environmental Credits. “Environmental credits” are certain enforceable rights represented to prevent, control, reduce, or remove emissions or other pollution that are separately transferable in an exchange transaction. Entities use those environmental credits to settle environmental credit obligations, to transfer to other parties in exchange or nonreciprocal transactions, or to meet voluntary environmental initiatives. Such credits include cap and trade programs, renewable portfolio standard (“RPS”) programs and renewable fuel standard (“RFS”) programs. They do not include income tax credits.
In general, an environmental credit will be recognized as an asset on an entity’s balance sheet if it is probable that the credit will be used to settle an environmental credit obligation. The rules for measuring and remeasuring the value of the asset, or derecognizing the asset, vary based on the nature of the credit. For all other environmental credits, the entity will recognize an expense when costs are incurred. The standard prescribes disclosure requirements in financial statements for environmental credits.
Environmental Credit Obligations. An “environmental credit obligation” is a regulatory compliance obligation arising from environmental protection laws that may be settled with environmental credits. (Voluntary initiatives and similar statements do not constitute environmental credit obligations.) An entity must recognize a liability when events (such as emissions) that occur on or before a reporting date result in an environmental credit obligation. The standard also prescribes disclosure requirements in financial statements for environmental credit obligation liabilities.
The new standard will be effective for public companies for annual reporting periods beginning after December 15, 2027, and interim reporting periods within those annual reporting periods.
The new standard will be effective for other entities for annual reporting periods beginning after December 15, 2028, and interim reporting periods within those annual reporting periods. Early adoption of the standard is permitted as of the beginning of an annual reporting period.
PCAOB Proposes Amendments to Audit Firm Quality Control Standard
By Thomas W. White, Retired Partner, WilmerHale
In an expected action, on June 9, the Public Company Accounting Oversight Board issued a supplemental request for comment on potential amendments to QC 1000, the PCAOB’s comprehensive quality control standard for registered public accounting firms. QC 1000 and related amendments were adopted by the PCAOB and approved by the Securities and Exchange Commission in 2024. As described in a prior note, QC 1000 established an integrated, risk-based standard that mandates quality objectives and key processes for firms’ QC systems, with larger firms subject to additional requirements. QC 1000 was originally to take effect on December 15, 2025, but the PCAOB extended the effective date to December 15, 2026 (see our prior note on the effective date extension).
The two most significant proposed amendments would
- rescind the “design only” requirement that required firms to design QC systems in compliance with the rules, even if they did not audit any public companies; and
- rescind the requirement that firms that audit more than one hundred issuers per year have an “External Quality Control Function,” i.e., a governance process in which one or more independent individuals evaluate a firm’s QC judgments made and conclusions reached when evaluating and reporting on the effectiveness of the firm’s QC system.
The proposal also includes changes to specific aspects of QC 1000 in the following areas: roles and responsibilities with respect to a firm’s QC system; information and communication; the QC monitoring and remediation process; evaluation and reporting on the QC system, including reporting to the PCAOB; and documentation requirements.
According to the PCAOB, the proposed changes, which it characterized as “narrow” and “targeted,” respond to concerns that “certain provisions of QC 1000 were unclear in their application, might impose higher costs than initially anticipated in relation to the potential benefits, or might be unnecessarily prescriptive.” PCAOB Chairman Demetrios Logothetis stated that “[w]hat staff is proposing today is not a retreat from QC 1000 or a reopening of the entire standard.”
SEC Issues Proposed Rules to Rescind Trade-Through Prohibition, Locking and Crossing Restrictions Under Regulation NMS
By Noah B. Levin, WilmerHale
On June 11, 2026, the SEC proposed amendments to Regulation NMS that would eliminate two longstanding rules governing how stock trades are priced and executed across trading venues. The first, Rule 611, prevents “trade-throughs”— situations in which a trade is executed at a worse price than the best price available on another exchange. The second, Rule 610(e), prohibits “locked” markets, which occur when the highest price a buyer is willing to pay matches the lowest price a seller will accept, and “crossed” markets, which occur when buyers are willing to pay more than sellers are asking. The SEC’s fact sheet discussing the proposed amendments attributes Rule 611 and 610(e) to increased costs, market structure complexity, limited order handling and execution choice, and trading fragmentation. Rescinding Rules 611 and 610(e) would, in the SEC’s view, reduce costs for market participants and allow competition and innovation to shape the continued evolution of U.S. equity markets. The public comment period will remain open for sixty days after publication in the Federal Register.
CFTC Rescinds Enforcement Settlement “Gag Rule”
By Noah B. Levin, WilmerHale
The Commodity Futures Trading Commission rescinded its longstanding policy requiring the Commission not accept settlement offers where a defendant continues to deny the allegations made in a complaint or administrative order. Colloquially known as the “gag rule,” the CFTC’s recission of the policy comes weeks after the SEC rescinded a rule similarly requiring defendants not publicly deny wrongdoing after a settlement has been reached. As with the SEC rescission, the CFTC also cited First Amendment concerns and the lack of a similar policy at other agencies. The policy change will apply both prospectively and retrospectively, meaning existing settlements that include a no-deny provision will not be enforced.
Kathleen Hutchinson Appointed Director of Office of International Affairs
By Noah B. Levin, WilmerHale
Kathleen Hutchinson has been appointed as the SEC’s Director of the Office of International Affairs (“OIA”). The announcement follows her service as Acting Director since January 2025. She has served in OIA since 2008 and at the SEC since 2003.
