01/20/2012 02:42:00 PM EST
What Are “Regulatory Assets Under Management” and Why Does a Private Fund Manager Need To Determine Them?
With the new registration requirements under the
Dodd-Frank Act and the enhanced reporting required of some private fund managers
under Form PF, private fund managers must now make a yearly (or sometimes more
frequent) calculation of their "regulatory assets under management."
Essentially this is a total tally of the assets over which the fund
manager provides investment advice, calculated using a method proscribed by the
SEC. There are a number of instances where a fund manager needs to make
Reporting. With the new registration
requirements under the Dodd-Frank Act, more private fund managers must now
register as investment advisers with the SEC or with state securities
divisions. In addition, even though some private fund managers may
be exempt from such registration, they must still submit Form ADV as an "exempt
reporting adviser." In either case, Form ADV requires that the
fund manager disclose its regulatory assets under management.
for an Exemption. Even after the enactment of the
Dodd-Frank Act, some fund managers are still exempt from registration.
Fund managers that have less than $25 million under management are
exempt completely if the fund manager's home state provides an exemption.
In addition, fund managers with less than $150 million under
management may be exempt from registration with the SEC (though they must
still submit Form ADV as an exempt
reporting adviser). To make a determination whether a fund
manager qualifies for one of these exemptions, the fund manager must
calculate its regulatory assets under management.
of Responsibility Between Federal or State Regulators.
If a fund manager must register, because it does not qualify for an
exemption, there is a division of responsibility between the state
securities divisions and the SEC. If a fund manager has $100 million
or less of regulatory assets under management, then in most cases, it must
register with its state securities division instead of with the SEC.
Once again, the calculation of regulatory assets under management is
used to make this determination.
PF. Private fund managers with $150 million or
more of assets under management within private funds are required to file Form PF annually, which requires the
fund manager to disclose regulatory assets under management. In addition,
certain large fund managers such as those with over $1.5 billion in hedge
fund assets under management will be required to report quarterly. A
determination of regulatory assets under management is used to determining
whether a fund manager qualifies for these requirements.
Therefore, being able to determine regulatory assets
under management is important for a variety or reporting and compliance needs.
The procedure for determining regulatory assets under management is
described in the instructions for Form ADV
and in the final rule published by the SEC regarding "Exemptions
for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than
$150 Million in Assets Under Management, and Foreign Private Advisers."
For private fund managers, there are a number of pitfalls.
First, when counting assets, the fund manager is required
to include all gross assets without any deduction for debt or leverage.
Therefore, if a fund has $30 million of assets and $20 million in debt,
it is considered to have $30 million in regulatory assets under management, not
Second, the fund manager must also include uncalled
capital commitments. This especially affects venture capital funds and
private equity funds, who will often require investors to commit a certain
amount of capital but not actually contribute cash to the fund until a later
date. Therefore, if a fund manager obtains a commitment from an investor
to invest $1 million, and the investor has only actually contributed $200,000,
the fund manager must include the remaining $800,000 in its regulatory assets
Finally, all assets must be valued at their market value
or fair value. For assets that are publicly traded securities, this is
relatively simple. The fund manager can use the most recent trade price.
But private funds often hold illiquid assets that are difficult to value.
How does the fund manager go about valuing those?
The SEC's guidance offers a number of suggestions.
First, for funds that issue financial statements for their investors that
utilize GAAP or some other internationally recognized accounting standard, the
values used in those statements can be used for calculating regulatory assets
under management. However, there are funds that do not produce GAAP
financial reporting (especially those which do not allow investors to enter or
leave the fund over its lifespan). For these funds, the process of
valuing assets becomes more complex. The SEC has explicitly said in its
commentary to the final rule that the requirement for calculating fair value
does not mandate a particular procedure nor require the use of a third-party
pricing service or appraiser. Rather the fund manager must act
consistently and in good faith. This ambiguity will likely cause fund
managers a great number of headaches in the years to come. It will be
crucial for them to adopt standards that are reasonable and consistently
applied year in and year out across all illiquid assets and to document all
decisions and methodologies used in determining asset values.
Fund managers should consult an attorney familiar with
securities laws in making any difficult determinations. Failure to do so
could lead to a fund manager failing to register when they should have, or
reporting inaccurate information, both of which could lead to sanctions from
Read more articles by Alexander Davie at Strictly Business, a
business law blog for entrepreneurs, emerging companies, and the investment
For more information about LexisNexis
products and solutions connect with us through our corporate site.