Calculating an Investment Adviser’s Regulatory Assets Under Management When Preparing the Form ADV Annual Amendment

January 08, 2013

Investment advisers registered with the U.S. Securities and Exchange Commission (“SEC”) or with the state securities regulators must file a Form ADV Annual Amendment each year within 90-days of the investment adviser’s fiscal year end.  Many registered investment advisers have a fiscal year end of December, which means that the Form ADV Annual Amendment for fiscal year end 2012 must be filed sometime between now and March 30, 2013.

Although there are several items in the Form ADV Part 1 that must be reviewed and updated as necessary, one of the primary Form ADV Part 1 items that must be updated by most investment advisers is the amount of assets under management.  In Item 5.F. of Form ADV Part 1A, an investment adviser must indicate whether it provides “continuous and regular supervisory or management services to securities portfolios.”  If the investment adviser responds “Yes” to this question it must then indicate the amount of regulatory assets under management and the total number of accounts the investment adviser firm is managing.  Although not the only determining factor, the dollar amount reported as regulatory assets under management is one of the primary factors investment advisers use when determining whether the investment adviser is eligible to be registered with the SEC or if the investment adviser needs to be registered with a state securities regulator(s).

Item 5.b. of the Instructions for Form ADV Part 1A (“Instructions”) explains how an investment adviser must calculate regulatory assets under management, and an investment adviser must follow these instructions carefully when completing Item 5.F. of Form ADV Part 1A.  The Instructions indicate that the investment adviser should include “the securities portfolios for which you provide continuous and regular supervisory or management services as of the date of filing this Form ADV.”  The Instructions go on to provide a definition of what should be included as “securities portfolios” and how to determine the value of the portfolio for purposes of reporting regulatory assets under management.  An investment adviser may have a difficult time determining whether the services the investment adviser is providing will meet the “continuous and regular supervisory or management” requirement.  The Instructions describe the “General Criteria” for meeting this requirement and provide the following “factors” that should be considered when an investment adviser is evaluating whether it provides continuous and regular supervisory or management services to an account:

(1)    Terms of the advisory contract;

(2)    Form of compensation; and

(3)    Management practices.

Additional details are provided in the Instructions for each determining factor, and the Instructions also give examples of situations where the investment adviser may provide continuous and regular supervisory or management services for an account and examples of situations where the investment adviser does not provide continuous and regular supervisory or management services for an account.

Investment advisers must ensure that they understand the requirements for calculating and reporting regulatory assets under management since filing inaccurate information could result in disciplinary actions, including the revocation of the investment adviser’s registration, being taken against the investment adviser.   Examples of enforcement actions taken by the SEC where the investment adviser allegedly reported an inaccurate amount of assets under management can be found in the Order Instituting Administrative Cease-And-Desist Proceedings against Calhoun Asset Management, LLC and the Order Instituting Administrative and Cease-And-Desist Proceedings against Barthelemy Group, LLC.

For more information on preparing your investment adviser’s Form ADV Annual Amendment, including discussion on calculating regulatory assets under management, register to attend the webinar, “Preparing Your Form ADV Annual Amendment,” that will be presented by RIA Compliance Consultants on January 10, 2013 at 12:00 CST.  During this webinar one of our senior compliance consultants will discuss the Form ADV items that are required to be updated on an annual basis, some of the common mistakes we see when investment advisers are filing their annual amendment, and some of the other amendments and filings that may need to be made with your annual amendment.  The cost for this webinar is $69.95.  Click here to register for this webinar.

RIA Compliance Consultants can assist your registered investment adviser with preparing and filing the Form ADV annual amendment.  If you would like to further discuss our Form ADV Annual Amendment services, contact your consultant if you are an existing client of RIA Compliance Consultants or click here to schedule a time to speak with one of our senior compliance consultants.

Posted by Bryan Hill
Labels: Annual Amendment, Assets Under Management, Form ADV