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News September 12, 2011 Issue

How to Calculate Regulatory Assets Under Management

The Dodd-Frank Act is reality. Private fund advisers will soon be registering, and smaller SEC-registered advisers will transition to state oversight.

By the first quarter of 2012, all currently SEC-registered advisers must file a Form ADV amendment disclosing their "regulatory assets under management" (regulatory AUM) as a first step in the process of determining which advisers will stay SEC-registered, and which will go. For soon-to-be registered private fund advisers, regulatory AUM will define on which side of the $150 million regulatory divide those advisers land.

So how do advisers calculate regulatory AUM?

Itís not your old AUM, thatís for sure.

Assets that are "under management," according to Advisers Act Section 203A, are all securities portfolios for which the adviser provides "continuous and regular supervisory or management services."

Some assets that formerly were excluded from the calculation, such as assets for which an adviser receives no compensation, are now included in regulatory AUM.

The instructions to Item 5.F of Form ADV Part 1 describe how to calculate regulatory AUM, and provide examples for guidance. An account is a "securities portfolio" if at least 50 percent of its value is represented by securities, including cash and cash equivalents.

All advisers with a current or pending filing obligation must include securities accounts in their calculation of regulatory AUM that are family accounts, proprietary accounts, and accounts of clients that are not U.S. persons.

All of the assets of a private fund are treated as a securities portfolio, regardless of the nature of the assets. Private fund advisers must also include uncalled commitments of capital in their regulatory AUM calculation.

Advisers, including sub-advisers, must include only the assets they actually manage as investments. A sub-adviser, for example, would include only that portion of a portfolio it manages. An adviser must include the entire value of a securities portfolio for which the adviser provides continuous and regular supervisory or management services, even if a portion of the portfolio is not securities. Other assets in a securities portfolio may be excluded only if the adviser does not continuously and regularly manage those assets.

Examples of services that do not constitute continuous and regular management are:

  • providing market timing recommendations without ongoing management responsibilities;
  • providing only impersonal investment advice, such as in a newsletter;
  • determining an initial asset allocation, without continuous and regular monitoring or reallocation; or
  • providing advice on an intermittent or periodic basis, such as quarterly review and adjustment of a portfolio, in response to a market event, or upon client request.

Regulatory AUM is calculated on a gross basis, without deducting any outstanding or accrued liabilities. This prevents the use of leverage to avoid registration requirements.

Private fund assets must be market valued, or fair valued where a market value is unavailable. Provided the regulatory AUM is calculated "consistently" Ė using the same methodology as used in financial reporting to clients, such as GAAP, for example Ė and in good faith, no third-party pricing is required.