Regulatory Assets Under Management

Ambrose Hill Capital is computing its regulatory assets under management for its annual Form ADV amendment. Its books show $340 million in discretionary separate accounts, $60 million in a leveraged fund it manages where the leverage was financed with borrowed money, $25 million in accounts belonging to the firm principals on which no fee is charged, and $90 million of family assets on which it gives one-time advice but provides no ongoing supervision. Which items count?

1. A.The leveraged fund must be counted net of the borrowed money, since regulatory AUM measures the client net equityRegulatory AUM is expressly computed without deducting outstanding indebtedness. Netting leverage would understate the figure and could put the firm on the wrong side of a registration threshold.
2. B.All four categories count, because regulatory AUM captures every dollar on which the firm has rendered advice during the yearOne-time or episodic advice without ongoing supervision is excluded. Continuous and regular management is the defining requirement.
3. C.Only assets on which the firm actually charges an advisory fee count, which excludes the principal accountsWhether a fee is charged is irrelevant to regulatory AUM. Proprietary and non-fee-paying accounts under continuous supervision are included.
4. D.The separate accounts, the leveraged fund at its gross value, and the non-fee-paying principal accounts count; the one-time advisory assets do notCorrect. Continuous and regular supervision is the test, and the computation is gross of leverage and includes proprietary and non-fee-paying accounts.

Why: Regulatory assets under management include securities portfolios for which the adviser provides CONTINUOUS AND REGULAR supervisory or management services. The measure is deliberately broad in some ways and narrow in others: it is computed GROSS of any outstanding leverage or indebtedness, and it includes proprietary assets and accounts on which no fee is charged. What it excludes are assets the adviser does not continuously and regularly supervise, such as a one-time consultation. So the separate accounts, the leveraged fund at its gross value, and the non-fee-paying principal accounts all count; the one-time advice does not.

An advisory firm with its principal office in State M reports $30 million of regulatory assets under management. State M examines advisers, and the firm would be required to register in 9 states. Its registration status is:

1. A.State registration in State M and notice filings or registrations in the other states, because it is a mid-sized adviser whose home state examines advisersCorrect. Between $25 million and $100 million with an examining home state means state registration. Nine states is short of the 15-state threshold that would permit SEC registration.
2. B.SEC registration, because any adviser with more than $25 million of regulatory AUM is eligible to register federally$25 million was the old bright line. Under the mid-sized adviser rule, advisers between $25 million and $100 million are pushed to state registration when the home state examines.
3. C.Either state or SEC registration at the firm election, since $30 million falls inside an optional bandThere is no election in this band. Mid-sized advisers meeting the conditions are prohibited from SEC registration; the choice is not theirs.
4. D.SEC registration, because it must register in more than one state and multistate advisers are federal coveredOperating in several states does not by itself make an adviser federal covered. The relevant count is 15 or more states, not merely more than one.

Why: An adviser with regulatory AUM between $25 million and $100 million is a mid-sized adviser. It is prohibited from registering with the SEC and must register with the state, provided it is required to be registered in the state where its principal office is located and is subject to examination there. Two escapes exist: if the adviser would be required to register in 15 or more states, it may register with the SEC instead, and if the home state does not examine advisers, SEC registration is required. Neither escape applies here.

A consultant advises several corporate employee benefit plans, with total plan assets of $220 million, on selecting money managers. She has no other advisory clients and no regulatory AUM of her own. Regarding SEC versus state registration, she:

1. A.May elect SEC registration under the pension-consultant provision, since the plans she advises exceed the qualifying asset levelCorrect. Consultants to plans of $200 million or more may opt into SEC registration despite lacking their own qualifying AUM.
2. B.Must register with the SEC because the plan assets exceed the federal AUM thresholdPlan assets she merely advises are not her regulatory AUM, and the provision is elective in any case.
3. C.Is ineligible for SEC registration until she personally manages at least $100 millionThe pension-consultant provision exists precisely to give eligibility WITHOUT that managed-asset test.
4. D.Must register in every state where any plan participant residesRegistration duties run to states where she has a place of business or clients (the plans) - not to every participant's home state.

Why: Pension consultants advising plans with at least $200 million in aggregate plan assets MAY ELECT to register with the SEC even though they lack the regulatory AUM that normally qualifies an adviser for federal registration. It is an option, not a mandate - she may remain state-registered instead. The clue is plan assets versus her own AUM. Review: Registration of BDs, Agents, IAs, and IARs.

An SEC-registered investment adviser has a fiscal year ending December 31. Its annual updating amendment, filed on March 20, reports regulatory assets under management of $84 million, and the firm is no longer eligible for SEC registration. Ignoring leap years, the LAST day it may file Form ADV-W to withdraw from SEC registration is approximately:

1. A.The end of June, being 180 days after the December 31 fiscal year endCorrect. The 180-day period runs from the fiscal year end, so a December 31 year end produces a deadline at the end of June.
2. B.Immediately upon filing the annual updating amendment, since eligibility is lost the moment it is reportedThe rule grants a transition window precisely so the adviser can complete state registration before withdrawing federally.
3. C.March 31, being 90 days after the fiscal year end90 days after fiscal year end is the deadline for filing the annual updating amendment itself, not for withdrawing from registration.
4. D.Mid-September, being 180 days after the March 20 filing of the annual updating amendmentThis anchors to the filing date. The rule measures from the end of the fiscal year, which is why an adviser that files late does not gain extra time.

Why: An adviser that reports on its annual updating amendment that it is no longer eligible for SEC registration must withdraw by filing Form ADV-W within 180 days after the end of its fiscal year. Counting 180 days from December 31 runs through the end of June. The deadline is measured from the fiscal year end, not from the date the amendment was filed.