Section 205(a)(1) prohibits a registered adviser from entering into, extending, renewing or performing an advisory contract under which the adviser takes a cut of the client's capital gains or appreciation. Section 205(b) lets through fees based on average asset value over a period, fulcrum fees for registered investment companies and accounts over one million dollars that rise and fall symmetrically against an appropriate index, business development company contracts capped at twenty per cent of realised gains, contracts with section 3(c)(7) funds and contracts with non-residents. Rule 205-3 adds the qualified-client exemption: performance fees may be charged to a client with at least the rule's assets-under-management or net-worth thresholds (inflation-adjusted by SEC order every five years, excluding the primary residence), to qualified purchasers and to the adviser's knowledgeable employees, with look-through to the investors in private funds. Section 205(e) authorises further exemptions and the periodic inflation adjustment.
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