Compliance Solutions for Investment Advisers

Compliance Alert! Calculating Regulatory Assets Under Management

Dear Compliance Professional,

The recently adopted SEC rules and rule amendments refer to an adviser’s “regulatory assets under management.” This new terminology distinguishes the assets reported in Form ADV Part 1 from the assets under management disclosure that advisory clients now receive in Part 2A of Form ADV. The changes also provide a uniform method of calculating assets under management by eliminating choices the instructions to Form ADV Part 1 had previously included. These choices enabled some advisers to opt in or out of federal or state registration by including or excluding a class of assets.

Securities Portfolios

Advisers must include in their regulatory assets under management securities portfolios for which they provide continuous and regular supervisory or management services. Nothing new there. Under the revised instructions to Form ADV Part 1, however, an adviser must now include the following types of securities portfolios when calculating its regulatory assets under management:

  1. Family or proprietary accounts;
  2. Accounts for which the adviser receives no compensation for its services; and
  3. Accounts of clients who are not United States persons.

Previously, advisers has the option of including these accounts in their calculation of assets under management for annual amendment purposes.

Valuing the Portfolio

Advisers must include the entire value of each securities portfolio for which it provides continuous and regular supervisory or management services. If an adviser provides continuous and regular supervisory or management services for only a portion of a securities portfolio, it should include as regulatory assets under management only that portion of the securities portfolio for which it provides such services. Advisers must exclude, for example, the portion of an account:

  1. That is under management by another person; or
  2. That consists of real estate or businesses whose operations the adviser “manages” on behalf of a client but not as an investment.

In addition, the revised instructions to Form ADV also clarify that an adviser must calculate its regulatory assets under management on a gross basis (e.g., without deduction of any outstanding indebtedness or other accrued but unpaid liabilities).

Advisers to Private Funds

When calculating its regulatory assets under management, an adviser must include the value of any private fund over which it exercises continuous and regular supervisory or management services, regardless of the nature of the assets held by the fund.  A sub-adviser to a private fund would include only that portion of the value of the portfolio for which it provides continuous and regular supervisory or management services.

An adviser must also include the amount of any uncalled capital commitments made to a private fund managed by the adviser.

Finally, advisers must use the market value of private fund assets or the fair value of private fund assets where market value is unavailable. This represents a change from the instructions to Form ADV Part 1 that permitted an adviser to calculate the value of its assets under management based on whatever method the adviser uses to report its assets to clients (e.g., what was in the fund documents) or uses to calculate fees for investment advisory services.

 

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