Should an investment advisor with $30 million of “assets under management” register with the SEC? It depends on whether the advisor has “qualifying” assets under management.
While there has been talk about raising the assets under management threshold for SEC registration, the Advisers Act currently sets the threshold amount at $25 million, but provides a $5 million “window” which permits an advisory firm with $25 million to defer registering with the SEC until it reaches $30 million in assets under management. Thus, an advisor with between $25 million and $30 million in “qualifying” assets under management is permitted, but not required, to register with the SEC.
Whether an advisor has qualifying assets under management for SEC registration purposes will be dependent upon a ‘yes” response to a two-part test:
Does the advisory account qualify as a “securities portfolio”? and
Does the advisor provide “continuous and regular supervisory or management services” with respect to a “securities portfolio”?
The SEC defines a “securities portfolio” as a portfolio in which at least 50% of the total value consists of securities, cash, and cash equivalents. If the account meets the 50% test, the advisor may include the value of the entire portfolio for “assets under management” purposes. An advisor may also include securities portfolios for which the advisor does not receive compensation for its services.
However, reaching the $25 million or $30 million threshold is only one part of the determination. The second, and most often overlooked (and misunderstood) determination is if the advisor provides “continuous and regular supervision or management services” (i.e., the advisor has discretionary authority or has ongoing responsibility to recommend and arrange purchases and sales of securities for a client) for the “securities portfolio.”
Generally, advisory accounts that are actively managed by an investment advisor on a discretionary basis qualify for SEC registration purposes. But, what about non-discretionary advisors? Do advisors that allocate assets among separate account managers provide “continuous and regular supervision or management services”? Fortunately, the SEC has provided guidance, together with some specific examples, as to whether an advisor provides continuous and regular supervisory or management services with respect to its investment advisory services, and correspondingly has qualifying assets for SEC registration purposes, Specifically:
1) Non-Discretionary Qualifying Assets: An advisor does not have discretionary authority over the account, but has ongoing responsibility to select or make recommendations, based upon the needs of the client, as to specific securities or other investments the account may purchase or sell and, if such recommendations are accepted by the client, the advisor is responsible for arranging or effecting the purchase or sale;