15 U.S.C. § 80b–5 — Investment advisory contracts

(a) Compensation, assignment, and partnership-membership provisions. A registered (or required-to-be-registered) adviser cannot enter, extend, renew, or perform an advisory contract made on or after November 1, 1940, if the contract: (1) pays the adviser based on a share of the client's capital gains or appreciation; (2) fails to state that the adviser cannot assign the contract without the other party's consent; or (3) — if the adviser is a partnership — fails to state that it will tell the other party about any change in partnership membership within a reasonable time. (b) Exceptions to the compensation ban. The ban in (a)(1) does not: (1) prohibit a fee based on a fund's total value averaged over a defined period or set dates; (2) apply to a contract with (A) a registered investment company, or (B) another client (except certain trusts, government plans, or collective funds) investing over $1 million, if the fee rises and falls in proportion to performance measured against a securities-price index or another SEC-specified performance measure; (3) apply to a contract with a business development company if (A) the fee is capped at 20% of realized capital gains, net of realized losses and unrealized depreciation, and a related condition in the Investment Company Act is met, and (B) the company has no related options, warrants, or rights, and no profit-sharing plan of the kind described in the Investment Company Act; (4) apply to a contract with a company excluded from "investment company" status under section 80a–3(c)(7); or (5) apply to a contract with someone who is not a U.S. resident. (c) Measuring compensation changes. For the performance-fee exception in (b)(2), the baseline point for measuring fee increases or decreases is the fee earned when performance matches the chosen index or benchmark; a securities-price index counts as "appropriate" unless the SEC orders otherwise. (d) "Investment advisory contract" defined. For (a)(2) and (a)(3), this term means any agreement where someone agrees to act as adviser to, or manage the investment or trading account of, another person — other than a registered investment company. (e) Exempt persons and transactions. The SEC — on its own motion by rule or regulation, or by order after an application — may exempt people or transactions from the (a)(1) capital-gains-fee ban, fully or with conditions, if it decides, based on factors like financial sophistication, net worth, financial experience, assets under management, or ties to a registered adviser, that the exemption fits this section's purpose. If the SEC uses a dollar threshold, such as a net-worth test, for any such factor, it must adjust that threshold for inflation by order, starting within a year of July 21, 2010, and every five years after that, rounding any adjustment to the nearest $100,000. (f) Authority to restrict mandatory arbitration. The SEC may, by rule, prohibit or limit agreements that force an adviser's customers or clients to arbitrate future disputes arising under federal securities law, its rules, or self-regulatory organization rules, if the SEC finds doing so serves the public interest and investor protection.