On February 15, 2012, the SEC issued a final release in which it adopted rule amendments (final rule amendments) to Rule 205-3 under the Investment Advisers Act of 1940 (Advisers Act), which governs the payment of performance-based compensation to registered investment advisers by qualified clients.  On May 10, 2011, the SEC issued a notice of intent to issue order (May 10 Notice) to modify the assets under management and net worth dollar thresholds informing the qualified client definition and to make additional amendments to Rule 205-3.  On July 12, 2011, the SEC issued an order (July 12 Order) that raised the qualified client dollar thresholds.  For a discussion of the May 10 Notice and the July 12 Order, see “SEC Order Increasing the Dollar Threshold for ‘Qualified Client’ Status Further Chips Away at the Utility of the 3(c)(1) Fund Structure,” Hedge Fund Law Report, Vol. 4, No. 28 (Aug. 19, 2011).  The final rule amendments codified the change in the qualified client dollar thresholds by amending the definition of qualified client contained in Rule 205-3(d) and adopted rules that are substantially similar to those proposed in the May 10 Notice.  Nonetheless, there are some important differences between the final rule amendments and the rule proposals.  This article discusses the final rule amendments in detail as well as the implications for hedge fund managers, particularly those that operate hedge funds that rely on the exclusion from registration of the hedge fund as an investment company contained in Section 3(c)(1) of the Investment Company Act of 1940.