Cumulative Hurdle Payouts

Definition

A preferred return that investors must receive, with any unpaid amount carried forward and usually compounding, before the sponsor's promote or the next tier of a distribution waterfall is paid. Where the sponsor is a registered investment adviser, federal law restricts compensation based on a share of capital gains or appreciation^[1], with exceptions that include contracts with funds relying on the 3(c)(7) exclusion and clients the SEC exempts by rule^[2].

Federal law

A market and contract term. No Act of Congress defines it; the federal laws below apply as described.

1. Investment Advisers Act of 1940 (Title II of Pub. L. 76-768), Pub. L. 76-768, title II, § 205, 54 Stat. 847 (15 U.S.C. § 80b-5). Restricts performance-based compensation in contracts of registered investment advisers (15 U.S.C. § 80b-5(a)(1)); it does not define hurdles. Official text: govinfo.gov, U.S. Government Publishing Office.
2. National Securities Markets Improvement Act of 1996, Pub. L. 104-290, § 210, 110 Stat. 3436 (Investment Advisers Act § 205(b)(4), (e), 15 U.S.C. § 80b-5). Added exceptions to the performance-fee restriction for 3(c)(7) funds and SEC-exempted clients (15 U.S.C. § 80b-5(b)(4), (e)). Official text: govinfo.gov, U.S. Government Publishing Office.