Be Careful When Covering Your Assets Under Management

You’ve found your way, intentionally or unintentionally, to the link for the National Compliance Services, Inc. (“NCS”) blog. By way of background, NCS is a leading compliance consulting firm located about a mile from the ocean in Delray Beach, Florida. This blog will focus on compliance advice for Investment Adviser Representatives (“IARs”) and Registered Investment Advisers (“RIAs”). Although my specialty is advertising and marketing compliance, I will be reaching out to NCS’ attorneys and consultants for assistance in discussing a wide variety of issues facing RIAs. NCS also has many broker-dealer experts who will help me address topics of interest to brokerage firms and registered representatives. We hope you’ll read some of our postings and will stop back again.

Although I rarely go to parties attended by investment adviser representatives (IARs), especially since I’m usually in bed by 9:30, I imagine there is shop talk. And sometimes, I’m sure, IARs talk about their firm’s assets under management.

If the IARs at the party are a competitive lot, I’m certain they discuss who is a better golfer and who has the most assets under management. Perhaps, now and then, IARs may inflate their assets under management to impress their friends and business associates.

I doubt that the SEC worries about what you say to your buddies at a party, but the Commission does care when you misrepresent your assets under management on Form ADV or in advertisements. You’re likely to get in trouble if your website, marketing materials, Facebook page, LinkedIn profile, or Form ADV misstate your assets under management.

At IA Watch’s 9th Annual IA Compliance Fall Conference 2009 held on September 21, 2009, Andrew J. Donahue of the SEC revealed that the assets under management of federally-registered advisers dropped $9.4 trillion or 22 percent. The median assets under management reported fell from $126 million to $97 million. Donahue, Director, Division of Investment Management, also noted that the SEC has experienced about 20 percent more withdrawals from registration than usual. Donahue said that about half of these withdrawals resulted from RIAs switching from SEC to state registration.

Whether your firm is SEC or state registered, you should never misstate your assets under management in your disclosure documents or in advertising materials. For example, if RIAs mention assets under management on their website, they should state the date on which assets under management were calculated. If a firm’s assets under management change significantly, the figures should be changed immediately in advertisements and marketing materials. It would be disingenuous and potentially misleading for an adviser to use old asset under management figures in marketing materials, especially if those amounts have dropped precipitously in recent months due to a decline in the market or the loss of a major client.

Newer advisers often find it difficult to attract clients, because some prospects are hesitant to deal with a smaller firm. Nevertheless, RIAs should never lead prospective clients to believe that the firm has more assets under management than it actually does. After all, you don’t want the SEC to think that Bernard Madoff is your role model. The Associated Press reported on October 2, 2009, that Madoff’s private investment business told the SEC in January 2008 that it managed assets worth $17.1 billion in 23 customer accounts. In fact, the firm had more than 4,900 open customer accounts. According to court papers, the firm told investors it had about $68 billion in assets under management.

In some instances, an adviser may have no intent to deceive the SEC, prospective clients, or IARs they meet at a party, but has merely miscalculated assets under management. Before an examiner points out your mistakes during a regulatory exam, you should familiarize yourself with the process for correctly calculating assets under management. We will give you advice on this topic in our next blog posting. If you e-mail me, I will make sure you are among the first to know about NCS’ latest blog postings.

Until you’re sure your numbers are accurate, avoid discussions of assets under management in marketing materials and advertisements, as well as at parties. I will remind you if we’re at the same party and it’s not 9:30 yet.

Les Abromovitz, an attorney, can be reached at NCS by calling 561-330-7645, Ext. 213, or by e-mailing him at labromovitz@ncsonline.com. Les is the author of GROWING WITHIN THE LINES: THE INVESTMENT ADVISER’S ADVERTISING AND MARKETING COMPLIANCE GUIDE (NationalUnderwriterStore.com; 800-543-0874; Amazon.com).