Securities Portfolios. Except in the case of “private funds,” discussed below, the new instructions do not alter the existing rule for determining what constitutes a “securities portfolio.” The instructions to Form ADV provide that an account is a securities portfolio if at least 50% of the total value of the account consists of securities.19 For this purpose, cash and cash equivalents “may” be treated as securities, suggesting that it is also permissible to treat cash and cash equivalents as other than securities. If an account is a securities portfolio, its entire value is included in calculating assets under management.
Until the amendment of Form ADV and its instructions by the Implementing Release, advisers had the option of including or excluding family or proprietary accounts, accounts managed without receiving compensation and accounts of foreign clients in calculating their “assets under management.” The new rules require that all of these types of accounts be included when determining “assets under management”. The objective of the revision is to avoid allowing advisers to opt in or out of regulation by calculating their assets under management in a manner designed to exceed or avoid exceeding a threshold.
Private Funds. An adviser that exercises continuous and regular supervisory or management services with respect to a “private fund” must include the value of all of the assets of the private fund, regardless of their nature, in its “regulatory assets under management” (i.e., the 50% rule described above that applies to securities portfolios does not apply to private funds). In addition, the amount of any uncalled capital commitments must be added to the value of the fund’s assets. Private fund assets must be valued at market value, or fair value if market value is not available.
Calculating the Value of “Securities Portfolios”
Implications for Advisers
Determining whether funds or accounts managed by an adviser qualify as “private funds” will, in certain cases, involve complexity and uncertainty depending on the nature of the adviser’s assets. Many advisers that may be able to take the position that one or more of their funds or accounts is not a private fund have not previously undertaken this analysis because they have relied on the exclusions from the definition of “investment company” provided by either Section 3(c)(1) or 3(c)(7) of the 1940 Act. Determining whether an account or fund falls within the definition of “investment company” under the 1940 Act, or qualifies for a definitional exclusion outside of 3(c)(1)/(7)(thereby excluding the fund or account from the definition of “private fund”) may require a detailed analysis of the investments held by the account or fund and the manner in which they are held. Similarly, where a fund invests in non-corporate private market investments, determining whether less than 50% of the total value of a fund that is not a private fund consists of “securities” can require a detailed analysis of the terms of the investments that may not yield a clear answer.
Advisers that fall within one of the prohibitions on registration with the SEC should also bear in mind that they must continually analyze whether their funds and accounts continue not to be “private funds, ” and whether the allocations or values of investments of their non-private funds has changed sufficiently, such that the non-private fund has become a “securities portfolio.” For example, a real estate fund adviser that increases its investment in debt securities in a fund may find that the fund no longer has less than 50% of its total value in securities.
The chart available here summarizes certain principles regarding how assets under management affect registration and ERA reporting requirements.
17 Form ADV now refers to assets under management as “regulatory assets under management,” to distinguish the term from the assets under management that must be disclosed in Part 2 of Form ADV. Assets under management need not be calculated in the same way for purposes of Part 2 (i.e., the “client brochure”). For example, the Implementing Release notes that an adviser may continue to disclose a net amount of assets under management in its client brochure.
18 The definition of “continuous and regular supervisory or management services” appears in the instructions for Part 1A of Form ADV.
19 “Securities” is broadly defined by the Advisers Act. Some examples of assets that would not constitute “securities” include, in most cases, fee title to real estate (held directly or indirectly through wholly owned, non-corporate subsidiaries), general partner interests or managing member interests, commodities and collectibles.
20 See Form ADV: Instructions for Part 1A, instr. 5.b.(4).
21 Section 203A(a)(1) of the Advisers Act. The adviser must also be regulated or required to be regulated in the state in which it maintains its principal office and place of business. All states regulate investment advisers, except Wyoming.
22 Section 203A(a)(2) of the Advisers Act.
For more information about the contents of this alert, please contact:
Elizabeth Shea Fries
Private Investment Funds
Real Estate Investment Management & Joint Ventures
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