Registered investment advisers are required to update their Form ADV Part 1 and 2A within 90 days of their fiscal-year end. For most advisers, the deadline is April 1, 2013.
One of the most important parts of the Form ADV is the calculation of assets under management (AUM). The SEC introduced a new method last year and there are a number of potential pitfalls that the staff will be looking out for.
- Being less than truthful: Some advisers may be tempted to exaggerate their assets to meet the higher $100 million threshold for SEC registration. While this is no doubt tempting, the SEC has made inflated AUM a top priority and any inaccuracies will likely trigger an examination.
- Failing to calculate properly: Under Dodd-Frank, the new definition of “regulatory assets under management” includes family and proprietary assets, assets managed without compensation, and accounts of foreign clients. Also, assets are now reported on a gross basis rather than net of debt. As a general matter, “assets under management” include the securities portfolios for which an advisor provides continuous and regular supervisory or management services.
- Confusing Part 1 and Part 2: Part 2 of Form ADV allows the advisor to use a different, more expansive, calculation than the strict formula in Part 1 as long as the advisor can explain the number and properly documents it.
- Missing the proper documentation: Advisers must be prepared to support their calculations in Part 1 and 2 with proper documentation, including the methods used. This information will be invaluable if your AUM is later questioned.
Per our prior posts on AUM, both the SEC and state agencies are taking a closer look at suspect asset levels.For additional assistance, please see our Practical Guide for Calculating Assets Under Management on Part 1A Form ADV.
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