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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
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
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