There seems to be a lot of confusion surrounding the issue of how to calculate regulatory assets under management. There is some good guidance surrounding this in the IARD training manual under Section 5.
First you must determine whether each client’s account satisfies the definition of a securities portfolio. An account will be treated as a securities portfolio if at least fifty percent of its total value is made up of securities. Cash and cash equivalents, including bank deposits and certificates of deposit, are viewed as securities. If fifty percent or more of the account value is comprised of securities, the entire account value is counted when calculating the adviser’s regulatory assets under management. A securities portfolio includes:
- Assets of foreign clients;
- Family or proprietary assets; and
- Assets managed without any kind of compensation.
If you have advised any of your clients to invest in a private fund, all of the assets are treated as a securities portfolio. You are required to determine the private fund’s current market value or fair value in order to calculate regulatory assets under management.
For all accounts that meet the definition of a securities portfolio you must determine if the accounts receive continuous and regular supervisory or management services. This is the case if you have discretion over the account or if you are responsible for evaluating specific securities or other investments based upon the client’s financial situation and make recommendations. You must be also be responsible for arranging or placing the purchase or sale of those investments. If you use third party money managers you must have the authority to hire or fire the managers.
The following should not be considered assets under management: (1) assets reviewed as part of a financial plan; (2) assets managed by a third party money manager where you do not have discretion to hire or fire the money manager; (3) assets held in an account where you are paid a commission and are not responsible for ongoing management services; (4) assets reviewed or consulted only at the specific request of the client and the final implementation decision is left to the client.
You should not deduct the following from your AUM calculation:
- Unpaid accrued liabilities;
- Outstanding loans; or
- Securities purchased on margin.
About Red Oak Compliance Solutions
Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.