Tag: Joseph Pastore

A daunting question that Registered Investment Advisers face in formulating their amended and annual form ADV 1 and ADV 2 (Brochure) submissions as required under the Investment Advisors act of 1940 is determining what the components of regulatory assets under management (“RAUM”) are, and providing adequate disclosure to the Securities and Exchange Commission (“SEC”) as to how and why the RAUM of some investment advisors is much less than the actual value of monies or investment vehicles managed.

Assets under management, or AUM, is a general term used throughout the financial industry that can be defined by many standards. AUM represents “investors’ equity” (like shareholders’ equity) and is an accurate representation of investors’ capital at risk (i.e., the amount of money that investors have invested in a manager’s fund(s))[1].  RAUM specifically refers to Regulatory AUM, which the SEC’s standard form of AUM[2].  The SEC developed this metric to have a consistent internal measurement, implementing a mandatory tiered registration of private investment advisers[3].  RAUM is the sum of the market value for all the investments managed by a fund or family of funds that a venture capital firm, brokerage company, or an individual registered investment advisor or portfolio manager manages on behalf of its clients[4].

In determining RAUM, the SEC specifically states that “In determining the amount of your regulatory assets under management, include the securities portfolios for which you provide continuous and regular supervisory or management services as of the date of filing the Form ADV[5].”  An account that a client maintains with a registered investment advisor is considered a securities portfolio if at least 50% of the total value of the assets held in the account consists of securities[6]. For purposes of this test, an investment advisor may treat cash and cash equivalents (i.e., bank deposits, certificates of deposit, bankers’ acceptances, and similar instruments) as securities[7].  The SEC also requires that you must include securities portfolios that are family or proprietary accounts, accounts for which no compensation for services is received, and accounts of clients who are not United States persons[8].

The SEC notes that “[f]or purposes of this definition, treat all of the assets of a private fund as a securities portfolio, regardless of the nature of such assets[9].”  The SEC does advise, however, that assets either the under management by another person or entity or assets that consists of real estate or businesses whose operations you “manage” on behalf of a client but not as an investment are excluded from the RAUM calculation[10].

RAUM also requires that supervision of these accounts be “continuous and regular.”  This term is defined by the SEC in two ways.  The advisor must have either discretionary authority over investments and provide on-going supervisory or management services, or, if they do not have discretionary authority over the account, they must have on-going responsibility to select or make recommendations based upon the needs of the client, as to specific securities or other investments the account may purchase and sell[11].  If such recommendations are accepted by the client, then the adviser is responsible for arranging or effecting the purchase or sale and satisfies the definition of “continuous and regular[12]”.

The SEC also uses three separate factors to determine whether supervision of assets is “continuous and regular.” The first factor is whether there was an advisory contract in place between the parties.   If the investment advisor agrees in an advisory contract to provide ongoing management services, this suggests that you provide these services for the account[13]. Other provisions in the contract, or the actual management practices, however, may suggest otherwise.  The second factor is the form of compensation received[14]. If the advisor is compensated based on the average value of the client’s assets managed over a specified period, this suggests that the advisor provides continuous and regular supervisory or management services for the account[15].  The third factor is the extent to which the assets are actively managed or whether advice is regularly provided to the client[16]. Note that no single factor is determinative, and the specific circumstances should be viewed in their entirety[17].

In summation, AUM is a method used to compute the total market value of investments that are managed by registered investment advisors on behalf of clients. RAUM is the SEC’s regulatory from of AUM. RAUM consists of the accounts that are made up of 50% or more of securities that are continuously and regularly managed by the registered investment advisor overseeing the facilitation and management of the client’s accounts.

^{[1] “Assets Under Management,” Investopedia, https://www.investopedia.com/terms/a/aum.asp, accessed February 5, 2021.
[2] Form ADV Instructions, https://www.sec.gov/about/forms/formadv-instructions.pdf, accessed February 5, 2021.
[3] Id.
[4] “Assets Under Management,” Investopedia, accessed February 5, 2021.
[5] Form ADV Instructions, accessed February 5, 2021.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Calculating Regulatory Assets Under Management – Wagner Law Group, https://www.wagnerlawgroup.com/resources/investment/calculating-regulatory-assets-under-management, accessed February 5, 2021.
[12] Id.
[13] Form ADV Instructions, accessed February 5, 2021.
[14] Id.
[15] Id.
[16] Id.
[17] Id.}