In yet another unintended consequence of the 2010 Dodd-Frank Act, new SEC rules designed to provide greater transparency in the hedge fund industry are creating new burdens on many family offices as well. Family offices typically escaped SEC registration by falling under the 15-client threshold where registration was required. With the removal of this automatic exemption, family offices must now file for an exemption if they meet the definition of what constitutes a “family” office – a narrow delineation of clients served based upon their legal or genetic connection to the family tree. Otherwise, they must file as a registered investment advisor and shoulder the associated annual regulatory burden.
This article posted by Private Wealth outlines responses to the new rules, and provides insights into the likely responses to these changes: http://www.fa-mag.com/pw-mag/pw-news/9405-family-offices-seek-to-shield-rich-clients-from-sec-disclosure.html
One response noted in this article – eliminating internal investment functions in favor of an outsourced investment model – would further a recent trend, albeit for different reasons. From a purely economic point of view, an administration only single-family office (SFO) business model could face mounting cost pressures to rationalize an independent, stand-alone operation handling the remaining back-office, concierge, and infrastructure of the SFO. We suspect more SFOs will begin to seek partnering solutions that will provide greater scale benefits in these functions yet allow a level of customization they need to serve the family clients’ unique requirements.
Family offices should also consider the role a private trust company could play in avoiding SEC registration requirements and the corresponding disclosure of assets and other private business information. Depending on the size and service model of the family office, a private, state-chartered trust company can confer a broad range of benefits beyond exemption from SEC oversight. So, maybe for some family offices it’s time to dust off that trust company idea and take a closer look.
We also note the impact on single family offices in the early stages of making a transition to a multi-family office (MFO) business model or MFOs which have heretofore operated under the 15-client threshold. With the additional cost and management burden of registration, smaller MFOs will need to grow quickly to overcome this drag on their financials.
Contributing author: Steve Randolph, Managing Partner