IA brief: Accuracy on assets reporting is crucial for upcoming amendment filing

March 11, 2014

By Jason Wallace, Compliance Complete

NEW YORK, Mar. 11 (Thomson Reuters Accelus) – The end of March is a crucial milestone of the annual compliance program for most registered investment advisers and exempt reporting advisers (ERA’s).

Every registered adviser and ERA must update their Forms ADV Part 1 and 2A within 90 days of its fiscal-year end, and that is March 31, 2014 for advisers whose fiscal year ended December 31.

A firm that fails to complete the annual amendment process risks losing its registration or ERA status. However, an amendment with an inaccurate tally of regulatory assets under management can be just as risky, and lead to increased regulatory scrutiny.

The Part 1 amendment is used to update information such as number of clients, number of accounts, and regulatory assets under management (RAUM). Arguably, the RAUM calculation is the backbone of the annual amendment, as it is the main determining factor for state or Securities and Exchange Commission registration and exempt reporting status as well. There are a few exceptions to qualifying for SEC registration, although most qualify based on RAUM of $100 million or more.

An incorrect and inconsistent RAUM number can be a sign of a poor or non-working compliance program. In addition, the RAUM can be a trigger for onsite examinations- especially if a firm has a large swing in RAUM from the previous amendment filing, whether up or down.

A look at the mechanics for filing the annual amendment and calculating RAUM can help ensure a smooth March 31st filing.

Annual amendment

The annual amendment to ADV Part 1 must be updated through the Investment Adviser Registration Depository (“IARD”). In order to get recognition for the filing, be sure to select “annual amendment” when updating the form online.

In addition to the filing, a firm must have sufficient funds in its FINRA Flex-Funding Account, prior to the annual amendment submission, to cover the system processing fee owed.

SEC-registered investment advisers pay a fee determined by the adviser’s regulatory assets under management, the fees for 2014 are:

Regulatory Assets Under Management Annual Updating Amendment Fee
More than $100 million $225
$25 million to $100 million $150
Less than $25 million $40

An ERA pays a flat fee of $150 for the annual updating amendment.

A registered adviser must also file all amendments to Part 2A (brochure) of Form ADV with the SEC electronically through the IARD and also deliver Part 2A (or provide a summary of material changes to Part 2A with an offer to provide the Part 2A) to its advisory clients in the next 30 days following the March 31st annual amendment due date. Note: the IARD system requires the filing firm to amend, retire (and replace) or confirm the existing firm brochure.

ADV Part 2B (brochure supplement) is not required to be filed electronically; a registered adviser must complete and deliver one or more brochure supplement[s] to its advisory clients, as appropriate.


The process of calculating RAUM is primarily made up of three steps and should be calculated in accordance with Item 5.F of Form ADV Part 1 and the accompanying instructions.

The first step requires the determination of an account being a securities portfolio, then deciding whether the adviser exercises continuous and regular supervisory or management services for that securities portfolio and finally the mathematical calculation of the dollar figure that counts toward the firm’s RAUM.

Securities Portfolio

A securities portfolio has at least half its total value in securities: cash and cash equivalents that can include stocks, bonds, collateralized mortgage obligations, swap options, commodities, commodity options, trust funds, bank deposits, certificates of deposit, bankers’ acceptances and other bank instruments. The calculations should include accounts for which the firm receives no compensation, foreign client accounts and any family or proprietary accounts.

For purposes of calculation, treat all of the assets of a private fund as a securities portfolio, regardless of the nature of such assets.

Continuous and regular supervisory or management services

Generally, an adviser exercises continuous and regular supervisory or management services if it has been granted discretionary authority over the account. An adviser may also include accounts if it does not have discretionary authority but it has an ongoing responsibility to evaluate specific securities and make recommendations if the adviser is responsible for arranging for, or effecting, the approved recommended purchases or sales.

Three general factors should be considered when evaluating whether an adviser provides continuous and regular supervisory or management services, they include:

  • Terms of advisory contract;
  • Form of compensation; and
  • Management practices.

For example:

  • An advisory contract calling for ongoing management services suggests that the adviser provides continuous and regular supervisory or management services to an account, although other provisions in the agreement or the adviser’s management practices may suggest otherwise.
  • The degree to which an adviser actively manages assets or offers ongoing advice has a bearing on whether it provides continuous and regular supervisory or management services, which may include allocating assets among mutual funds or other advisers.

    If allocating among other advisers, the primary adviser should have discretionary authority to hire and fire the sub-managers and reallocate the client’s assets. Conversely, providing market-timing recommendations without ongoing management responsibility or offering impersonal advice in a market newsletter may not be viewed as continuous and regular supervisory or management services.

  • An adviser does not provide continuous and regular supervisory or management services if its role is limited to determining the initial asset allocation, without subsequent reallocations, or only giving intermittent or market event-driven advice.


Lastly, an adviser is required to add up the current market value of account assets. The RAUM value is based on the account’s market value within 90 days before filing the Form ADV Part 1. An adviser should determine market value using the same method it uses to report account values to clients or to calculate fees for advisory services.

The adviser should do separate calculations for discretionary and non-discretionary accounts. An adviser must also keep track of the total number of accounts over which the firm provides continuous and regular supervisory or management services.

An adviser is required to determine the private fund’s current market value or fair value in order to calculate RAUM. In addition, private fund advisers are required to include any uncalled commitment pursuant to which a person is obligated to acquire an interest in, or make a capital contribution to, the private fund.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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