When registering as an investment adviser, the Form ADV asks if I have discretion to select the broker-dealer for my clients. All my clients have discretionary accounts with me and I only use one brokerage firm so I thought the answer to this question would be "yes". However, I've been told I should mark the answer "no". Can you explain?
While you may "recommend" a broker-dealer to your clients, or even "require" that they use a certain brokerage firm, ultimately it's up to the client to sign the customer agreement (i.e., the contract) with the broker-dealer. You would only have "discretionary authority" to select the brokerage firm if, for example, you had a power of attorney, were a trustee on a trust, or were the personal representative (or executor) of an estate-client. In those circumstances you could sign the agreement with the brokerage firm on behalf of the client. When it comes to discretionary authority, the question you have to ask yourself is: "Can I act on behalf of the client without getting further approval?" In most cases you can't open an account with a broker-dealer on behalf of the client.
I understand the SEC is now calculating "assets under management" differently. Do we now count the variable annuities sub-accounts?
— D.C., Florida
The SEC has indeed revised the method for calculating what they now refer to as "regulatory assets under management." Based on the instructions to Form ADV, I don't think there's any reason to exclude the variable annuities from the value of the securities portfolio. There's really a two-part analysis you need to make. The first is whether the account is a "securities portfolio." An account is deemed a securities portfolio if at least 50% of the total value of the account consists of securities. Clearly, variable annuities are considered "securities" so we then move to the second question. Does the account receive continuous and regular supervisory or management services? The instructions state that you provide continuous and regular supervisory or management services with respect to an account if you have discretionary authority over the account and provide ongoing supervisory or management services with respect to it, or if you just monitor the account and stand ready to make changes on an on-going basis. This is different from merely rebalancing the account periodically based on criteria that is not client-specific. For example, if you rebalance all your clients' accounts every quarter because that's what your general asset allocation model tells you to do, then you're not providing continuous and regular management services. On the other hand, the fact that you make infrequent trades (e.g., based on a "buy and hold" strategy) does not mean your services are not "continuous and regular." The instructions to the Form ADV provide additional guidance and examples.
Alan J. Foxman is an attorney in private practice in Boca Raton, Fla.
He also works as an independent contractor with National Compliance Services
Inc. in Delray Beach, Fla. He can be contacted at this email address.