For investment advisers, accurately calculating their regulatory assets under management (AUM) is crucial for compliance with reporting requirements. Understanding which assets should be included and how to determine if continuous and regular supervisory or management services are provided can sometimes be challenging.
In this blog post, we will provide a step-by-step guide on calculating investment adviser regulatory AUM, taking into account the instructions outlined in Form ADV.
Calculating regulatory assets under management
To begin calculating regulatory AUM, identify the securities portfolios for which you provide continuous and regular supervisory or management services as of the date of filing the Form ADV.
A securities portfolio is defined as an account where at least 50% of the total value consists of securities. Cash and cash equivalents, such as bank deposits, certificates of deposit and bankers acceptances, can also be treated as securities for the purpose of the 50% test.
Include the following types of securities portfolios in your AUM calculation:
- Family or proprietary accounts.
- Accounts for which you receive no compensation for your services.
- Accounts of clients who are not United States persons.
Additionally, for private funds, consider all the assets of the fund as a securities portfolio, regardless of their nature. Include any uncalled commitments related to the fund in the securities portfolio as well.
What assets should be counted towards regulatory AUM?
The key question in determining whether an asset should be counted towards AUM is whether the investment adviser provides continuous and regular supervisory or management services for the securities portfolio. Consider:
- Discretionary Authority
Discretionary authority plays a significant role in this determination. If the investment adviser has discretionary authority over a securities portfolio, it should be included in the AUM calculation only if the adviser provides ongoing supervisory or management services for the portfolio. If the adviser does not reviewed the portfolio on an ongoing basis, it should not count towards regulatory AUM.
- Non-Discretionary Authority
Even without discretionary authority, if the adviser has an ongoing responsibility to select or make recommendations for specific securities or investments based on the client’s needs, the investment adviser must affect the transaction. The securities portfolio should be included in the AUM calculation. If the investment adviser does not affect the transaction upon client approval, the investment adviser cannot count the asset(s) as AUM.
- Sub-Advisor Relationships
If an investment adviser refers clients to third-party advisers or money managers and has discretionary authority to hire and fire the third-party advisers or money managers, the investment adviser can include the client’s securities portfolio managed by these entities in its AUM calculation.
- Other factors
Apart from discretionary and non-discretionary accounts, other factors, such as the terms of the advisory contract, form of compensation or management practices, may contribute to meeting the continuous and regular supervisory or management services threshold. Ensure that these factors align with the requirements set forth in Form ADV.
However, if an investment adviser has established a portal with the 401k plan custodian to transact in the client’s account, and the service meets the criteria noted above, the adviser can include the value of the account in the AUM calculation.
By following the guidelines outlined in Form ADV and considering factors such as continuous and regular supervisory or management services, discretionary authority and other relevant criteria, investment advisers can accurately determine their AUM. Adhering to these guidelines ensures compliance with regulatory reporting requirements and helps maintain transparency and integrity in the industry.
It is essential for investment advisers to stay informed about any updates or changes in regulatory requirements and consult with legal and compliance consultants to ensure accurate calculations of AUM. Additionally, maintaining comprehensive and well-documented records of AUM calculations and supporting documentation is crucial for regulatory examinations and audits.
Remember, the determination of regulatory AUM has significant implications for investment advisers, including registration requirements, reporting obligations and compliance with regulatory thresholds. By understanding and correctly calculating their AUM, investment advisers can confidently fulfill their regulatory obligations while providing valuable services to their clients.
Disclaimer: This blog post is for informational purposes only and should not be construed as legal or financial advice. Consult with qualified professionals for guidance specific to your situation and jurisdiction.