Performance fees are advisory fees that are calculated and paid based on a fund’s performance relative to a predetermined benchmark. Section 205 of the Advisers Act prohibits the use of performance fees by RICs that are marketed to the general public unless compensation under them increases and decreases proportionately with the performance of the fund over a specified period in relation to the investment record of an appropriate index (a "fulcrum" fee). (Rule 205-3 under the Advisers Act permits registered investment companies that are sold only to sophisticated investors to use any form of performance fee arrangement). Amounts reflecting the performance fee must be accrued on a daily basis and included in the daily net asset value. Performance fee arrangements are generally considered related party transactions and, therefore, Regulation S-X and GAAP require detailed disclosure in the notes to the financial statements describing the terms of these arrangements. These disclosures should include, but are not limited to, a description of the benchmark, the length of the performance measurement period (for example, 12 months, 24 months, 36 months, etc.), as well as a brief explanation of a fund’s performance relative to its benchmark as of the reporting date. In cases where a fund has a multi-class structure, the footnotes should also identify which class is being used to compute fund performance. Other items for disclosure include details of the composite used (if applicable), range of performance fees in basis points and the timing of cash payments to the adviser (for example, monthly, quarterly, annually, etc.), as well as a discussion of the null zone (range of fund performance for which no performance fee adjustment is payable). 

Investment Company Act Release No. 7113, issued in 1972, and related Rule 205-2 under the Advisers Act, form the principal SEC guidance on performance fees. Release 7113 states "[T]here is a fiduciary obligation to use an interval sufficiently long to provide a reasonable basis for indicating the adviser's performance" and indicates that a performance period of at least one year is sufficient for this purpose. It also notes that arrangements often include a rolling measurement period whereby periodic payments are made to the advisor based upon the proceeding rolling twelve month (or longer) performance period. Release 7113 and Rule 205-2 should be consulted if questions arise about the application of performance fees in particular situations.

Rule 205-2 requires the computation of the performance element of the fee based upon the average net assets over the entire performance period (e.g., a performance fee computed over a three-year period must be assessed over the average net assets for the prior 36 months). When a rolling measurement period is used, the "base" element of the fee may, however, be assessed on the average net assets of the current period (i.e., month or quarter). In the past, the SEC has brought enforcement action against a number of registered investment companies for improperly levying the performance element of the fee against only the current period's average net assets.