Tag: regulated assets under management

How Do You Define AUM?

The Securities and Exchange Commission took a big step with private funds and setting a defined standard of Regulated Assets Under Management. There is still discretion in how different aspects are calculated. It works well for hedge funds and private equity funds. It starts breaking down as you have more alternative assets that fall outside the definition of “private fund” and “securities portfolio” that ties to the RAUM definition.

For real estate, INREV published a tool for defining Assets under Management: Assets Under Management (AUM) 2021.  

INREV interviewed a bunch of asset managers to figure out how they came up with their AUM numbers. The resulting paper summarizes the main components of AUM and options for each component. It’s not a prescriptive attempt to standardize AUM. It’s just a thought peice.

INREV came up with ten components. Each component has two to four different ways of treatment. For example, one component is the ownership of JV’s and co-investments, with these options:

  • 100% regardless of ownership
  • 100% if the asset is consolidated in the financials but ownership
  • 100% if asset mgmt services are provided for the asset, but ownership share only if not
  • % ownership share only

Of course you can argue that JVs may be treated differently than co-investments, so there could easily be more components and more options.

The INREV summary is a good way to think about it. With the ten components and each factor, that gets you to over 36,000 different ways to calculate AUM using the INREV breakdown.

Obviously, one driving factor is the “ask” accompanied by the AUM request. It means having to give a summary of what went into the AUM calculation.

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Don’t Overstate Assets Under Management

over inflate

I’ve said it before: Don’t overstate assets under management. You need to keep records on your calculations and be able to prove the calculations.

Umesh Tandon ran Simran Capital Management and was trying to land California Public Employees’ Retirement System (CalPERS) as a client. The problem was that CalPERS required prospective investment advisers to have at least $200 million in assets under management.

According to the SEC Order,  Tandon lied and stated that his firm met that test. In reality, the firm had only $80 million in assets under management. The Firm’s Form ADV stated that the firm had $102 million in assets under management.

Once that line was crossed, the firm used overinflated statements of assets under management when pitching other clients.

Then the SEC examiners showed up and popped the bubble. Now Tandon is barred from the securities industry and has to pay a substantial fine.

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The Danger of Overstating Assets Under Management

Form ADV requires a registered investment adviser to state the firm’s assets under management. The new form changed the calculation and the term to “regulated assets under management”. At the same time, the threshold between state and federal registration has been increased from $25 million to $100 million.

I thought it would be useful to look back to 1997 when the regulation of investment advisers was first split at the $25 million level. Warwick Capital Management wanted to stay registered with the SEC and was accused of inflating its assets under management to maintain SEC registration. The main charge was a violation of Section 203A of the Investment Advisers Act. But the firm was also found to have violated section 207 by making an untrue statement of material fact in an SEC filing. Fraudulent intent is not required under Section 207. Even more, violations of Sections 206(1) and 206(2), by falsely representing Warwick’s assets under management and 2003 total performance returns to database services that published the misrepresentations to subscribers in the securities industry. Section 206 prohibits actions would operate as a fraud or deceit on a client.

In 1996 Warwick’s Form ADV listed $5 million of assets under management on a discretionary basis. In 1997 when the registration threshold increased, Warwick inflated assets under management to $26.55 million. That kept the firm under SEC registration and examination, instead of state-level.

Warwick also used inflated numbers in database services that acted as referral sources for Warwick. The amounts differed from those used in Form ADV and even differed from service to service.

Of course, you probably realize the importance of keeping the records that prove performance. Warwick did also. But they were destroyed in a fire, or a smoking chimney, or a flood. When asked by the SEC to make the records available, the firm used those series of excuses. The Administrative judge took the position that records never existed.

It probably comes as no surprise that in addition to inflating assets under management, Warwick inflated performance returns.

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Inflating the Balloon by Terry Feuerborn